Pay as you drive to slash insurance bill

Imagine this: as a motorist you make a single annual payment and thereafter drive into service stations as frequently as you like, fill up with petrol to your heart's content and drive away owing nothing more.

Intriguing as the idea might be, there is no chance of it being introduced: it would immediately be attacked for encouraging people to make even more journeys by road, and for benefiting heavy car users at the expense of low-mileage motorists.

Nevertheless, as environmental campaigners point out, this is exactly the system which operates for motor insurance. Car insurance premiums are a fixed, not a variable, cost of running a car. As a result, the expense of making an extra trip by car appears to be very low.

Simon Bishop, researcher with the Institute for Public Policy Research (IPPR), argues that motorists' attitudes would change if insurance was, like petrol, bought on a pay-as-you-drive basis.

'People would have an incentive to think of their insurance costs as related to their actual use of their vehicle,' he says.

The IPPR has recently been encouraging the idea of pay-as-you-drive insurance in Britain as part of its more general research into sustainable car usage. Bishop points to a North American study which, among other things, claims that pay-as-you-drive insurance could reduce motoring by more than 10 per cent.

Bishop also argues that lower-income motorists could particularly benefit from the change. The present insurance system effectively includes a hidden cross-subsidy for wealthier motorists, he suggests.

With toll charges coming in for central London next spring, motorists will soon become more familiar with the idea of paying for the journeys they make. However, pay-as-you-drive insurance has its detractors. The AA is not convinced: 'Most motorists appreciate the freedom that their car provides, and would not wish to restrict their car use in this way,' says its spokesperson, Rebecca Hadley.

Up to now, British insurers have been equally disinclined to take up the idea. The one exception is Norwich Union, which is seeking 5,000 motorists to join a pilot pay-as-you-drive insurance scheme. Sue Rowland, programme manager for the pilot, says the company could eventually offer this as an addition to its motor insurance product range. But not yet - first Norwich Union wants to analyse the results of the pilot.

Pay-as-you-drive insurance requires some way of recording the miles driven. Bishop says IPPR favours simple, low-tech solutions, perhaps involving the government's Driver and Vehicle Licensing Agency.

Norwich Union, however, is opting for a sophisticated electronic monitoring approach, with vehicles tracked continuously via global positioning satellite technology. The insurer hopes the pilot will provide detailed data of how, when and where cars are actually used, and whether accidents and claims can be identified with particular factors.

Norwich Union drops the bombshell that pay-as-you-drive insurance won't actually be possible for the pilot, or at least not initially: participating motorists will have to pay for their insurance in the traditional way.

Perhaps aware that their initiative could be written off as little more than an in-depth customer research exercise, Norwich Union does promise that there will be benefits for taking part, although these have yet to be announced.

Even with a successful pilot, Rowland estimates that Norwich Union will not be ready to launch a pay-as-you-drive insurance product until 2004 or 2005.

Annual mileage is generally just one of a number of factors taken into account when premiums are set. Drivers may well find, for example, that their postcode area or their recent claims history count for more than usage.

Bishop hopes this approach will eventually change. 'What's attractive about pay-as-you-drive is that it's something the market could easily deliver without a great deal of government intervention,' he says.

Perhaps so, but only if motorists start clamouring insurers to provide it.

The problem at the moment may be that motorists don't really want to think about just how expensive it is to run a car.