I don’t mean Telematics (that’s a whole other post actually). I mean Pay-As-You-Go, or otherwise only paying for Insurance when you’re driving or when you leave the house with your camera gear. There are a few InsurTech Startups that have raised millions of dollars like MetroMile, Trov and Slice to name a few that offer Pay-As-You-Go car insurance, gear etc..

Combined, these StartUps have raised 100’s of Millions of dollars already in Venture Capital so how in my right mind should I be questioning the wisdom of all of those investment dollars? There’s one single psychological trait that we muggles (regular Joe/Jane human) seem to have that I believe will nearly always relegate Pay-As-You-Go to niche status. Consumers that benefit are the ones that don’t drive much or otherwise have extremely low utilization.

Pay-As-You-Go insurance couples the pain of paying for insurance to the benefit of driving or utilization. I’m not kidding.

Consumers are doing mental accounting when they’re using this type of insurance and guess what? It’s annoying. Just think about it. Regular people mentally combine or separate experiences in the form of mental accounting that seems to explain a great deal of common (mis)behaviours.

Here’s where I get nerdy on you: Drazen Prelec of MIT and George Loewenstein of Carnegie Mellon University did the following study:

“Mr. A and Mr. B both joined health clubs. Mr. A’s club charged a fixed fee for each month of usage, payable at the end of the month. Mr. B’s club charged an hourly fee for using the health club, with the total payable at the end of the month. By chance, both men used the health club about the same amount, and both ended up getting a bill for the same amount at the end of the month. Who enjoyed himself more while at the health club? Of the people who were asked this question, 38% said that the men would be indifferent. But of those who thought one man would be happier than the other, 48% thought that Mr. A would be happier, compared to only 14% who thought Mr. B would be happier.”

Prelec and Loewenstein observed the same effect across three additional scenarios involving fixed versus variable fees.

So, what the researchers have documented is that there’s a flat-rate bias in many consumer transactions. The researchers pushed the mental accounting metaphor as far as explaining that there were dual effects, the pleasure of consuming and the pain of paying for consumption.

Just think about your own experience at a gas station filling up your SUV and paying for it up front using cash, the pleasure of driving and pain of payment is experienced at the same moment.
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The same behaviour applies to fixed and variable pricing of Insurance. When the cost is fixed, we experience the pain of payment once per month. When the cost is per usage, we experience the pain of payment everytime we drive in real time right there on our mobile phones – the pain of payment is associated with the experience.

Generally decoupling the pleasure of a purchase from the pain of payment is a good idea if you want happier users that have average or higher utilization.

Now don’t get me wrong, there’s a place for Pay-As-You-Go insurance. I just think it’s not going to be as prevalent as everyone thinks. My mother is a great candidate for this type of Insurance since she maybe drives once or twice a month, but she already pays insanely low monthly rates and would be unlikely to adopt a fancy app and even bother to turn it on as she’s driving – so maybe she’s not a good candidate.

Want to add to the conversation? Comment Below!

Suggested Reading:

Soman and Cheema, “Earmarking and Partitioning.”
Thaler, “Mental Accounting Matters.”

Author Profile

Behzad Salehoun
Behzad Salehoun
Behzad has deep insurance industry experience, most recently co-founding BrokerLift, a SaaS eCommerce platform for Insurance companies and brokerages. In the past he led the development and launch of uBiz, a Commercial Insurance platform for Gore Mutual Insurance and the marketing strategy & analytics for InsuranceHunter, a digital insurance broker in partnership with Aviva Insurance. Behzad as an independent consultant has also advised some of the largest Insurance Brokers, Managing General Agents (MGA’s), and General Insurers on digital strategy and transformation, marketing and the digital insurance customer.

Today Behzad currently consults, develops & invests in innovative insurance ideas, independently, or along with established Insurance Companies that are looking for a digital edge.