It may not come as a surprise, but Australia is home to almost as many vehicles as people, with the Australian Bureau of Statistics reporting that there were just over 20 million registered vehicles nationwide as of January 2021.
How these vehicles are used is of course very different.
Many Australians rely on their car every day to get to and from work, or to actually get work done. On the other hand, many people rarely drive and mostly leave their vehicles parked in the garage, except for a quick trip to the shops or a weekend getaway.
For car owners who drive less frequently, there is relatively little flexibility when it comes to the car insurance available to them.
But that’s starting to change with the emergence of dedicated usage-based or “pay-as-you-drive” options, which typically offer infrequent drivers cheaper coverage than regular comprehensive policies.
Giselle Nguyen, a Sydney driver who works from home most days and typically only uses her car for school drop-off and pick-up, was driven to find a more suitable insurance option when she realized how little she cared for Pandemic used during school time.
“I think after the lockdown round last year, when the car was definitely used even less, I realized that my insurance was almost useless because my car was just sitting there,” she says.
“And then my premium actually went up quite a bit, which kind of annoyed me because I knew I was paying for something I had even less of a chance than before, so I definitely wanted to find something a lot cheaper. “
Nguyen has since switched to a pay-as-you-drive policy with another insurer, which she says can significantly reduce her premium costs for the year.
“I switched to KOBA in February. Because of how it works, there’s an upfront fee, and then there’s a per-kilometer cost each month. Based on that and an estimate for the year, I think it’ll come out with about $700 in savings – but that’s how ridiculous my old offer was.”
How does pay-as-you-drive insurance work?
As the name suggests, pay-as-you-drive auto insurance policies take into account distance driven as one of the most important metrics in pricing. This means that car owners who drive less will be charged less, with the logic that they are less likely to be involved in an accident and claim damage.
A number of insurance companies are now offering options for drivers willing to stay under a certain distance limit. Financial comparison website Mozo currently tracks six insurers with such policies in its database.
“Comprehensive auto insurance can be expensive, so pay-as-you-go might be cheaper depending on the offer,” says Claire Frawley, personal finance expert at Mozo.
“Pay as you drive car insurance is really great for people who don’t drive every day. Whether you commute to work on public transit or have two cars in the household, it’s a great way to only pay for the distance you drive.”
Typically, there are two ways that usage-based policies work. Most commonly, the car owner selects their intended use (e.g. 9000 km/year) and submits a mileage reading to the insurer, which is then used to calculate the premium. However, motorists must stay under the distance limit if they want to avoid additional costs.
The second option takes the guesswork out by reporting information directly back to the insurer via black box or smartphone and then using the distance data to calculate the premium. One of the only Australian providers to offer pay-as-you-drive insurance calculated using real-time data is KOBA, the insurer Nguyen switched to earlier this year.
Under the KOBA model, the premium cost is split into two parts: an upfront fixed fee that covers fire, theft and third-party damage while the car is parked, and a flat-rate mileage rate that is calculated each month. KOBA Chief Executive Andrew Wong says that while KOBA’s model may not suit everyone, it is designed to provide lower rewards for low-use drivers.
“Calculating with the pay-per-kilometer model, if you drive a traditional mileage, call it 13,000km, which is the national average, our policy will be more or less the same as everyone else’s. So, the way you make savings is by driving less.
“With us, you are fundamentally in control. So if we go into another lockdown, or if you’re a FIFO worker or lucky enough to take a month’s vacation, you don’t pay anything because you don’t drive. With that in mind, you don’t run the risk of getting into a collision and that’s why we don’t charge you.
The compromise between driving data
Cheaper premiums may appeal to infrequent drivers, but there are concerns about fares that rely on real-time data. These include the range of data that is actually being collected and whether more accurate data will actually benefit drivers in the long run.
In the case of KOBA, Wong says that while the company receives data that allows it to build a picture of how safe a driver is, the ultimate focus when calculating a bounty is the distance someone drives.
“Obviously, data is a very sensitive topic and we’re very aware that we’re getting some pretty interesting stuff. But we believe the data belongs to the consumer,” he says.
“In the future we will have driving data that will tell us about people’s habits, how they drive, their level of safety and things like that. And we calculate a safe driver rating for everyone, but we don’t use it to drive premium. Our premium is calculated based on the distance you travel.
“Our hope is that things like driving behavior can be used to engage consumers and make them safer, rather than trying to poke them for it.”
While KOBA may not plan to include its safety rating in the premiums, Andrew Parton, oceanic insurtech leader and financial services technology consulting partner at Ernst & Young, says some people might be in for a shock if there’s a broader movement to leverage data like Accelerate and braking to determine the risk of individual drivers.
“There will be winners and losers depending on how your risk is perceived. Right now, with less data, more people will be put into an average because the three risk factors are limited to where you live and what car you drive and how old you are.
“I may think I’m a good driver, but maybe I’m not as good as I think I am, or maybe I’m not as risk-averse compared to others. And indeed, my premium could go up, because if it’s based on specifics and not an average, there’s no guarantee it will go down.”
Will smart, usage-based insurance prevail?
Data-driven pay-as-you-drive insurance may be in its infancy in Australia, but there are indications from overseas that it will continue to grow. As Parton points out, some auto insurers in the United States are making it more accessible by doing away with black boxes in favor of smartphones.
“There is some research that predicts quite significant growth in usage-based insurance over the next 10 to 20 years, with compound annual growth of between 20% and 30%. So that’s pretty significant.
“I think the one thing that’s probably driving some of that growth is that you don’t have to put a physical device in the vehicle anymore. All of the major deals from carriers in the US are smartphone-based, so just download an app and it tracks whatever it needs to track.”
Parton says, however, that the advent of autonomous vehicles could completely change the auto insurance landscape in the more distant future.
“When you don’t have a human driving and the safety of the vehicle is determined by the software in the car and who wrote the software, that changes the whole perspective of car insurance,” he says.
“Even if usage-based insurance doubles in 10 years from today, it’s likely to be superseded by the whole autonomous vehicle phenomenon anyway.”
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