Usage-Based Insurance and Pay-As-You-Drive (PAYD) Models

Understanding Usage-Based Insurance and Pay-As-You-Drive (PAYD)

Usage-based insurance is a novel model in which car owners are charged premiums based on their driving behaviour and how much they’ve driven. There are two types of usage-based insurance models – 

• Pay-As-You-Drive (PAYD)

It’s the best model for car owners who rarely drive. Under the Pay-As-You-Drive (PAYD) insurance model, premiums are calculated according to the distance you’ve travelled, i.e., your car’s mileage. So, heavily used vehicles pay higher premiums, while less-used cars pay lower premiums. 

• Pay-How-You-Drive (PHYD)

Premiums are calculated based on your driving behaviours, such as driving speed, braking patterns, and overtaking vehicles. This model rewards responsible drivers with safe driving behaviours and vice versa. 

Usage-based insurance is a broad insurance category, and PAYD is a subset of the same. This new insurance model works entirely on telematics data. Every vehicle equipped with a telematics device collects data, such as mileage, speed, braking, and engine health, and sends it to insurers. 

Insurance companies use this real-time vehicle data and driving behaviour to generate individualised risk profiles. The same risk profile helps insurers create personalised car insurance premium plans for different customers. This approach is entirely different from the traditional fixed-rate model, in which premiums were set upfront based on generic statistical data.
 

Benefits of Usage-Based and PAYD Models

If you’re wondering why you should choose telematics car insurance over a traditional policy, then the following benefits will give you strong reasons. 

• Cost Savings for Low Mileage and Safe Drivers

For drivers who clock fewer kilometres or maintain disciplined driving habits, usage-based and PAYD models can lead to significant premium savings. It means car owners pay only what’s proportionate to their mileage and driving behaviour.  

• Transparency in Premium Calculation

Transparency is one of the most valued aspects of this model. If you choose telematics car insurance, you can see how your vehicle usage and driving behaviour influence the insurance costs. It reduces the mystery around premium pricing and helps strengthen customer trust. 

• Encouragement for Safer Driving Habits

Since driving behaviour directly affects insurance premiums, car owners will intentionally drive safely to become eligible for lower premiums. It can increase the overall road safety if all car owners follow this approach.
 

Technology and Implementation in India

As usage-based insurance in India is still relatively new, insurers are exploring various technologies to facilitate its smooth implementation. The following points will give you a better understanding of the existing technology and implementation process. 

• Telematics and Mobile Apps

Insurers are utilising telematics and connected mobile systems to gather the data needed to create personalised car insurance plans. They’re exploring different options, from plug-in telematics devices to smartphone-based solutions for flexible yet accurate and real-time data collection. 

These tools allow policyholders to track driving insights while enabling insurers to assess usage without intrusive processes. Digital adoption has made such models more practical than ever before. 

• IRDAI’s Role in Regulation

IRDAI launched a regulatory sandbox initiative in July 2019, allowing Indian insurers to trial usage-based insurance without undergoing a lengthy approval process. This trial was conducted with a limited audience. 

On 5th July 2022, IRDAI officially mandated this new insurance approach after witnessing successful results. Hence, you can now find several insurers providing usage-based insurance in 2025. 

• Real-World Examples

The biggest real-world example is Shriram’s Car Insurance policy. It follows the Pay-As-You-Drive (PAYD) insurance model, where your car’s mileage directly influences the premium. You can find similar policies by other leading insurers, such as HDFC Ergo, Tata AIG, and ACKO.
 

Challenges and Consumer Concerns

Personalised car insurance plans based on the usage-based model have numerous benefits, but they aren’t free from challenges and consumer concerns. The following are the most common challenges and consumer concerns surrounding usage-based insurance in India.

• Privacy

Since usage-based insurance relies on continuous gathering of real-time driving data, it has raised serious privacy concerns among policyholders. Some drivers also worry about how much information is collected, how it is stored, and whether it’s shared with third parties for non-insurance purposes. Insurers must address these privacy concerns to strengthen customers’ trust.

• Data Security

There are worries about data security as telematics devices collect sensitive information. If the data isn’t protected, it may fall into the wrong hands. Such a data breach can affect both insurers and car owners. 

• Consent Issues

If a telematics device is pre-installed in a car or it sends vehicle data through its advanced built-in vehicle connectivity system, some users may not have given explicit consent for data collection and usage. 

Hence, one of the key concerns for customers is around clarity on what data is collected, how long it is stored, and how it is used. Without transparent, explicit consent mechanisms, adoption can significantly slow down.    

• Acceptance Among Different Customer Segments

While younger, urban car owners may embrace data-driven insurance, others may be hesitant. Hence, the biggest challenge insurers face is getting all customer segments to accept these new usage-based insurance plans.
 

Future Outlook for UBI and PAYD in India

The following points will provide clarity on the future outlook for usage-based insurance (UBI) and PAYD in India.

• Growing Adoption

As connected vehicles become more common and smartphone-based telematics systems improve, you can expect UBI and PAYD adoption to rise steadily.

• Expected Market Trends

The future models of telematics car insurance may incorporate more refined risk scoring and dynamic pricing. You can also expect improved integration with vehicle health data, so insurance becomes increasingly responsive to real-time usage rather than static assumptions.  

• Integration with Other Insurtech Innovations

UBI and PAYD are likely to converge with AI-driven underwriting, automated claims processing, and predictive risk alerts. Such integrations will create a more seamless and proactive insurance experience.
 

Conclusion

Usage-based insurance in India highlights a meaningful shift in how car insurance works in the country. Unlike traditional car insurance policies, the new model is significantly fairer and more transparent about premium pricing. Yet, they may not replace traditional policies overnight.

If you’re someone with responsible driving habits, you can benefit the most from the PHYD model. People who drive less should choose the PAYD model. You may explore the Car Insurance from Shriram General Insurance as it’s based on the Pay-As-You-Drive (PAYD) model.
 

FAQs

1.What is usage-based car insurance?

It refers to a car insurance policy in which premiums are calculated based on how much you drive and your driving behaviours, rather than a fixed-cost method.
 

2.How is pay-as-you-drive different from traditional insurance?

The Pay-As-You-Drive (PAYD) method is vastly different from traditional insurance because it charges a premium based on your car’s mileage. So, if you use your car less, you pay a lower premium and vice versa.
 

3.What data impacts UBI premiums?

Numerous data points are collected to determine UBI premiums. We’re talking about data, such as driving speed, engine health, mileage, braking patterns, and accidents.
 

4.Are these models widely available in India?

These models are still in their early stages, so adoption isn’t yet fully complete. However, you can easily find these models at all leading insurers.
 

5.How is data privacy handled?

Insurers are managing data privacy concerns by getting explicit user consent before collecting any vehicle data. They’re also implementing stronger data protection measures to strengthen data privacy.