Applying Behavioral Economics Concepts in Designing Usage-Based Car Insurance Products

Behavioral economics, a discipline combining economics and psychology to explain consumer decision making, offers insights on how best to institute transportation pricing in a manner that is acceptable to drivers and also meets public policy objectives. As an example of how to use this relatively new discipline to enhance the acceptance and benefits of transportation pricing, its application to designing usage-based or pay-as-you-drive-and-you-save (PAYDAYS) insurance products is explored. Specifically, this research would apply lessons from behavioral economics to the marketing and designing of PAYDAYS insurance products to maximize profitability, consumer acceptance, and public benefits. By converting fixed insurance costs to per-mile or per-minute-of-driving charges, PAYDAYS insurance encourages voluntary reductions in driving and related decreases in congestion, air pollution, and crashes, and for these reasons has garnered substantial interest among government entities, environmental and other non-profit organizations, insurance companies, and consumers. General behavioral economics research findings strongly suggest substantial but rarely acknowledged differences in vehicle-miles traveled would result depending upon which PAYDAYS insurance product features, from a large variety of possibilities, are chosen. Behavioral economics demonstrates that how economic choices are framed for consumers affects the choices they make. The pricing levels and structure of different usage-based pricing plans affect initial purchasing decisions, customer retention, and usage. After summarizing the PAYDAYS insurance pricing schemes being tested in the U.S. marketplace, this paper examines the broadest array of existing and potential PAYDAYS insurance pricing attributes and their effects, at least directionally, on attracting and retaining customers and discouraging driving. Summary tables at the end identify target markets, product structure, and pricing and related attributes that would maximize participation and mileage reductions among participants. A pilot experiment design is proposed to increase understanding about the application of behavioral economics to PAYDAYS insurance. Public policy options to encourage PAYDAYS insurance generally, and the product attributes that lead to the best outcomes specifically (e.g., the greatest congestion and crash reductions), are discussed.