“Pay as you go” car insurance – will it work?

Basing car insurance premiums on how, when and where people drive will end the situation whereby safe, infrequent drivers subsidise risk-takers. However, the idea is unlikely to spark an insurance revolution.

A full 90% of us rate ourselves as above-average drivers, according to one well-known Princetown University survey. Statistically this is clearly impossible, but if you are convinced you are a low-risk driver the insurance industry might have a deal for you. The concept, trialled by Norwich Union, is called "pay as you go" (PAYG).

Users are charged for their car insurance on a monthly, rather than annual, basis. As well as factors such as location and type of car, the cost varies according to how often and at what time of day you drive. Norwich Union says young drivers are ten times more likely to have an accident at night than during the day.

So, PAYG insurance for 18 to 23-year-olds ranges from a few pence a mile during daylight hours, up to £1 a mile in the 11pm to 6am danger zone. The insurer gets this data via satellite from a "black box", a GPS device about the size of a video cassette that is fitted to your car for a one-off fee.

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So could this be the future of car insurance? The concept seems sound enough. Unlike using DNA to tailor health insurance cover, which seems unfair, we all have some choice about how, when and where we drive. PAYG addresses critics of the current system who argue that infrequent, safe drivers effectively subsidise high-mileage drivers who also tend to be from higher income groups. Any system that offers incentives to drive fewer miles should cut pollution and help relieve congestion. It may also appeal to parents whose teenage offspring are buying their own cars for the first time in terms of encouraging safer driving and cutting insurance costs.

But the idea is unlikely to spark an insurance revolution. While it could help some young drivers to find affordable insurance, the financial benefits of PAYG for experienced drivers are unclear.

Claims that it offers big discounts to low-mileage drivers are fine except that other "conventional" insurers, like the AA, adjust premiums to reflect this anyway. Worse, if your driving habits are even slightly unpredictable, working out whether you will save money by switching is tricky and, given the wide range of charging rates, getting your maths wrong could be costly.

Most tellingly, despite growing numbers of cars coming fitted with anti-theft devices or SatNav software, tracking devices are hideously unpopular a moneysupermarket.com survey last year found that nearly a third of us would not agree to a "black box" (which not only captures where you've been but also how fast you got there), even if it cut insurance premiums to zero.

It seems the idea of being penalised for driving at certain times or to certain places sits uneasily with one of the main reasons people buy a car in the first place personal freedom.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.