Pay as you drive and pay how you drive

What are pay as you drive and pay how you drive?

Pay as you drive (PAYD) and pay how you drive (PHYD) are forms of usage-based motor insurance. Under PAYD, the own damage premium is linked to how much the vehicle is used, usually the kilometres driven in the year. Under PHYD, the premium is linked to how the vehicle is driven, measured through telematics: speed, harsh braking and acceleration, time of day and similar signals, scored and turned into a discount or loading.

In both cases only the own damage part changes. The third party premium remains the rate notified by the government.

How usage-based motor insurance works in India

On 6 July 2022 IRDAI allowed general insurers to offer technology-enabled add-ons to motor own damage cover. The permission covered pay as you drive, pay how you drive, and a floater policy covering several two wheelers or private cars owned by the same individual. These are filed by each insurer as add-ons to the base own damage policy.

IRDAI's Master Circular on General Insurance Business of June 2024 went further and asked insurers to offer usage-based options such as pay as you drive to motor customers alongside conventional cover.

Insurer wordings show how this works in practice:

One private car wording, for example, gives a 10% margin over the declared kilometres before the claim is reduced, and illustrates PHYD discounts and loadings of up to 20% depending on the score band. Terms vary widely between insurers.

Floater motor cover

The floater option lets one individual owner insure several two wheelers or private cars under one own damage policy instead of buying separate covers. It can suit households with a car and two wheelers, or a car that is used only at weekends.

What usage-based motor insurance means for distribution

• A real saving for low-mileage owners. Retired customers, people who work from home, and owners of second cars often drive far less than the average assumed in standard pricing. PAYD can cut their own damage premium, which is a strong renewal and retention argument.
• Explain the claim-time consequence. The most important line in a PAYD sale is what happens if the customer drives more than declared and does not top up. Proportionate claim reduction surprises customers. Sales scripts should state it plainly and remind customers to update the odometer reading when their usage changes.
• Self-selection is the insurer's risk. Low-usage and careful drivers are more likely to choose these options, which is adverse selection against the standard book. Insurers manage it through pricing and data checks. For distributors, this means usage-based options may not be offered for every model, vehicle age or region.
• Data and consent. PHYD relies on location and driving data. Distributors should know what data is collected, how long it is kept and how the customer can withdraw consent, and should not promise discounts that depend on the score.
• Digital channels lead. Usage-based products need app onboarding, odometer photo uploads and periodic reminders, which suits insurtech and direct channels. Agency and dealer channels can still sell them but need simple digital support from the insurer.
• Not a replacement for NCB. The no claim bonus still applies on the own damage premium. Advisers should show the combined effect of NCB and any usage discount rather than presenting one as a substitute for the other.