Mileage-based insurance: a radical step against inflation and towards sustainability

As the urge to decrease our CO₂ emissions becomes stronger and stronger globally, sustainability has become a priority for any company in the world, including auto insurance companies. In addition, the current geopolitical events in Europe and the rest of the World are pushing the prices up in many markets, lowering the purchasing power of most of the population. This makes customers even more price sensitive, including regarding their auto insurance policies. Therefore, in today’s context, we believe mileage-based insurance is a field most auto insurers should investigate.

1. What is mileage-based insurance?

Mileage-based insurance (MBI), also called as Pay-As-You-Drive (PAYD) insurance, originates from pay-per-mile programmes, where the monthly insurance premiums are calculated based on vehicle mileage reported by the drivers, sometimes using a photo of the odometer. They are based on a simple model, but not automated and open to fraud, which pushed insurers in the direction of telematics-enabled MBI.

MBI is an insurance policy type where an aftermarket telematics device in the vehicle – or the vehicle itself – sends mileage data to the insurance company. The driver’s insurance premium is then entirely or partly mileage-based (sometimes combined with location and time data). While remaining simple to understand, MBI policies reward low mileage drivers, who, in most cases, carry lower risks than frequent drivers. Additionally, MBI programmes have an indirect positive effect on drivers’ fuel consumption and therefore on the environment (i.e. CO₂ emissions, noise,) as drivers will pay more attention to the miles / kilometres they drive.

Some of the other opportunities brought by MBI include:

• The ability to sell value-added services (i.e. real-time traffic information, vehicle locator, roadside assistance, remote diagnostics);
• The possibility to leverage the increasing penetration of connected cars, making embedded telematics-enabled MBI incrementally accessible.

MBI is very popular in the UK, due to the very high costs of insurance for young & senior drivers, pushing these segments towards telematics-enabled programmes which are most of the times cheaper than traditional policies. According to our estimates, there are currently 13 active MBI programmes in the UK, representing over 150,000 policies as of December 2021.

One of the most successful MBI programmes in the UK is By Miles’ Pay-by-mile. It was launched in mid-2018 in collaboration with Redtail Telematics. The miles driven are directly collected and transmitted by an On-board diagnostics (OBD) dongle sent to each policyholder.

In other European countries, like France, the number of active MBI programmes is still relatively low, but we expect it to grow in the coming years. We estimate that MBI programmes represented 24% of all active programmes worldwide at the end of 2021, and 24% of all active policies:

• In the last 5 years, the number of MBI programmes has grown globally at a CAGR rate of 17%.
• Since 2016, smartphones and tag based MBI programmes have grown even faster, at 19% CAGR per annum.

2. MBI is becoming a must-have product for auto insurers

As a direct consequence of the COVID-19 outbreak, there has been a notable increase in demand for MBI programmes around the globe, owing to drivers’ growing desire for products more suited to their changing patterns and frequency of usage. Indeed, the pandemic has both:

• Reduced the mileage of drivers overall, due to increased work from home practices.
• Increased disparities between mileage between consumers

Moreover, the skyrocketing prices (i.e. fuel, electricity) in Europe and in most of the world as a consequence of the invasion of Ukraine are heavily impacting the purchasing power of drivers. Hence, offering MBI products in the current context is becoming increasingly important for auto insurers to target the abundant number of drivers willing to save money on their monthly insurance premiums.

Additionally, environmental, social, and governance (ESG) criteria are impacting all sectors of society, including insurers. Insurers are first and foremost focusing on their own practices and operations, but are incrementally expected to behave as agents for imposing positive ESG change on their external stakeholders, including their policyholders. In this context, it is more and more common to find estimates of policyholders’ CO₂ emissions in auto insurers’ ESG reporting. Therefore, auto insurers not offering MBI programmes could be perceived as the ugly duckling, as they would end up having all the high-mileage drivers.

Finally, MBI is also a way for auto insurers to enter the connected auto insurance industry in a relatively simple way, and to develop capabilities for future non-mileage-based programmes (i.e. usage-based programmes like Pay How You Drive).

Nowadays, most auto insurers are heavily investing on marketing to communicate how sustainable they are as a company and on how their prices are lower than their competitors. Still, many of them do not propose any auto insurance programme that is usage or mileage-based. Hence, we believe the problem is still very much of a supply issue rather than a demand issue. As the demand for mileage-based programmes will continue to increase for the reasons described earlier, we expect auto insurers to incrementally enter the mileage-based insurance market segment, targeting mainly low mileage drivers, drivers with low purchasing power, and environmentally-conscious drivers.

Therefore, both for environmental and financial reasons, we expect auto insurance companies to jump en masse to MBI.

Want to know more?

PTOLEMUS explores the evolution of the mileage-based insurance market, and much more, in its Connected Auto Insurance Global Study. You can download a free abstract of the study to learn about how it can help your company’s connected auto insurance strategy.