Autos: Pay As You Drive

Those little GPS navigation devices on the dashboard have made driving unfamiliar terrain a lot easier. Now an innovation that combines Global Positioning technology with mobile phones promises to make driving a lot cheaper, for some. Cars can now carry gizmos that capture GPS location data and send them via mobile phone to the insurance company, which charges drivers a fee determined by when, where and how far they drive, rather than a flat rate. Motorists can reduce their fee by simply driving less, or by limiting high-risk nighttime and rush-hour driving, and choosing roads with low speed limits, traffic medians and guard rails instead of trees.

Already a dozen or so insurers in the United States, Europe and Japan, including Plymouth Rock of Boston, Sara Assicurazioni of Milan and Aioi in Tokyo, offer these so-called pay-as-you-drive schemes. "It's beginning right now, everywhere," says Arnold Vandervoorde, actuary manager at Corona Direct, a Brussels -based insurer of 80,000 vehicles. "It's the future." Vandervoorde expects more than half of his policyholders to sign up within a few years of its PAYD launch, expected in 2008.

The new scheme promises to make insurance affordable to the roughly 5 percent of vehicles in developed countries that aren't insured at all, mainly because they aren't driven very much. Environmental groups are also enthusiastic, and with good reason. Studies conducted by the Oregon Environmental Council in Portland showed that PAYD participants reduced their driving by about 20 percent, on average. The council helped persuade the state legislature to pass a tax break for PAYD insurers.

One unintended benefit of PAYD is that it exposes the inequities of traditional automobile insurance, in which low-mileage drivers subsidize people who use their cars a lot or take their cars on risky roads. Mark Fitzgerald, an insurance consultant at Boston-based Strategy Analytics, says this unfairness is creating a growing "consumer backlash" among safe and low-mileage drivers. Vicky Tyler, a Londoner, is one of them. After she switched to Norwich Union's PAYD plan late last year, her monthly premiums dropped from about £70 to £20. "I've managed to recruit two of my friends," she says. Lower insurance premiums and reduced pollution: the merging of GPS navigation systems with mobile-phone technology is getting off to a good start.