Analysis of profitability of Pay-As-You-Speed scheme

Implementing usage-based insurance (UBI) schemes captured the attention and has found a better practical foundation, thanks to the presence of probes for recording the driving and traveling data. The UBI is believed to provide an incentive measure through premium discounts for correcting driving and traveling behavior. However, the success of UBI implementation is dependent on different factors including the presence of alternative insurance plans, the level of privacy concerns among society, and the amount of trust within the society. Therefore, designing proper discount schemes which affect UBI acceptance by drivers and its profitability for government and insurance companies differs across countries and different scenarios. We aim to investigate the profitability of UBI Pay-As-You-Speed in Iran with a focus on the government and insurance companies. This study will be beneficial for policymakers seeking to understand the potential impact of UBI Pay-As-You-Speed in Iran.

The research is conducted on a synthesized population with acceptance and accident frequency models based on a self-reported survey. We assumed six UBI schemes based on previous research. The acceptance model is a logit discrete choice model and the accident frequency is based on Poisson regression. Costs of crashes are estimated based on one-year data of the Central Insurance company in Iran. After models' estimation, the simulated population is used to estimate the resultant profit of private insurance companies and government.

It is found that the scheme with no premium discount and no rental prices for the required monitoring device, results in the highest revenue for the government. Moreover, with an increase in the probe penetration rate, the profitability of the government increases with a greater reduction in crashes. However, this trend is not observed for insurance companies because the cost of the monitoring device and premium discounts offset the profits gained from prevented crashes.

The presence of the government as a main actor in facilitating the implementation of UBI schemes is essential or private insurance companies would be reluctant to provide these schemes to customers.