The Eff ect of the Introduction of a “Pay Per Use“ Option within Motor TPL Insurance

Abstract

In this paper the effects of the introduction of the so called “pay per use” -insurance products are examined. These products collect data of mileage of kilometers driven by policy holders. As a result of this data, policy holders can get a refund on the insurance-premium paid. Since there is a positive correlation between mileage and the risk of causing an accident the refund is granted to low-mileage drivers, so in theory the “pay per use” product is more attractive to low-mileage drivers than to long-distance drivers. The authors examine empirical evidence to fi nd out whether or not it is mainly low-mileage-drivers who choose the “pay per use” product. Secondly, the authors examine whether there are other signifi cant differences between characteristics of “pay per use” policy-holders and “traditional” policy- holders. Therefore a random sample of 4,000 car-insurance – clients (2,000 “pay per use” policy-holders and 2,000 “traditional” policy-holders) is reviewed. In addition the effects of the introduction of “pay per use” products are discussed, in case of a selection effect between low- and high -mileage drivers is observed.

Keywords

• insurance
• pay per use
• pay as you drive
• adverse selection
• selection effects