Japan Gets PAYD 3

Here's a little something I'll be keeping an eye on: Japanese insurance company Aioi has started to offer pay-by-the-mile car insurance. (See page 2 of this pdf.)  This is an especially nifty development, since it means that Aioi will be working out some kinks in the technology (the company will verify mileage with a device installed in policyholders' cars), which could help PAYD make the leap across the Pacific.

Just to recap: Pay-as-you-drive insurance (or PAYD) offers huge advantages over the all-you-can-drive policies that dominate the U.S. First of all, PAYD is fairer, since it doesn't force low-mileage drivers to subsidize people who drive a lot. Generally speaking, crash risk accrues by the mile: People who drive more crash more. But most insurance policies don't sufficiently account for the differences in risk -- meaning that low-mileage drivers overpay for insurance, while high-mileage drivers underpay. Even the policies that give a price break to relatively low-mileage drivers don't close the gap: People who don't drive much still get shafted.

Not only is pay-by-the-mile insurance fairer to low-mileage drivers, it also creates an automatic disincentive for extra driving: Just as an all-you-can-eat buffet makes it more likely that you'll gorge yourself, all-you-can-drive insurance policies make it likely that you'll drive more. Because most people pay more for their car insurance than for gas, PAYD has roughly the same effect on driving as a doubling in the price of gas.

So far, U.S. insurance companies have only taken baby steps towards PAYD. In 2003, Oregon even passed tax incentives to sweeten the pot, trying to convince some insurer to develop a PAYD product. But so far, no company has taken the bait.

And that's pretty understandable -- PAYD suffers from the "first mover" problem, in that the first company to offer PAYD not only has to create a new market for this kind of insurance, it also has to work out all of the technical kinks in tracking and verifying policyholders' mileage.

Which is why Aioi's move is so promising: If they're successful (and even if they aren't), they can start to work out the technical glitches U.S. insurers have been reluctant to wrestle with. Plus, if Aioi can figure out how to market PAYD in Japan, it just might convince U.S. insurers that there's a similar business opportunity on this side of the Pacific. Neat!

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