Pay-as-you-go insurance: A boon for Indian consumers?

By Dr P Nandagopal

Is pay-as-you-go insurance a boon for Indian consumers? Well, this is a loaded statement. 

Whether it’s a boon or not so, requires closer examination of key aspects of how insurance works, what drives its cost and which factors influence the user experiences and the eventual customer delight. 

First, let’s understand what’s Pay-as-You-Go Insurance (PYGI)? 

It’s a mode of coverage, where you need to pay for only the time it’s used, like your water or electricity bills. The most common example of PYGI is travel insurance.

You take pay-as-you-go travel Insurance only when you take a flight and not while you are on the ground. Similarly, you may take overseas health cover when you are travelling abroad. Why so? Because you perceive the risk of losing bags or falling sick while traveling is high and worried that the expenses of health care or missed flights in a foreign land are too painful.

This means the probability of an adverse factor occurring as well as the intensity of pain of such adverse events is perceived to be high, which drives your decision to buy travel insurance.

Also read: How do Modern Health Insurance Plans help you save costs? 

Now, please appreciate both probability and intensity of pain, are the key things that drive the need for insurance from a customer perspective. Where both these factors are high, the cost of insurance goes up and where it’s less, premiums charged are lower.

In a long journey of life, people meet with many adverse events. They do not know when and how exactly they could fall victim to such events. Insurance companies can cover these uncertain adverse events and still make some money, only when things are less probable so that they don’t end up paying more than what their claim reserves could withstand. If the probability is high, that means there will be a greater number of people who claim than what is estimated, and insurers end up in huge losses, unless they rate up their premiums steeply. This is the reason why, high probable risks (home insurance for people living in river beds, health insurance for people with critical illnesses) are routinely denied, because they are sure ways for the insurance companies to go belly up.

What does all this have to do with Pay-as-You-Go Insurance (PYGI)? 

In PYGI, customers intuitively choose a “high probable” moment to pay for insurance and they will avoid paying when the moment passes. This means, in PYGI, by design the underlying risks are higher in the pool of policies the insurance company covers. So, naturally, Insurers have to charge higher premiums for those short periods of high-risk moments. Is this a boon for customers? Yes and No.

Yes, because even if the short-period PYGI costs are proportionately high, still overall the customer saves money than covering the full year where only few moments could be high risk. The example of travel insurance underscores this point. Why will anyone should take an annual travel insurance cover when he/she likely to take only one or two trips abroad in a year? It makes sense only to cover those trips than the whole year.

If this logic is applied to car insurance, you pay for insurance only when you take the car on the roads but not while it is in the parking lot. Just like toll, you pay car insurance too for the rides you go on expressways, where the probability of accidents may be higher.

So, it’s a boon for the customer, right? Well, this could also cause some problems for the customers. Imagine, he/she forgets to activate the car insurance before going on a road trip. Insurance may not be at the top of your mind when you plan to go on a long drive with the family. Forgetfulness, and too much selection in choosing when to activate PYGI (“I will take only when I am crossing 100 km speed” ) can negate the feeling of overall security a person should enjoy for a hassle-free life.

So, in essence, use PYGI rationally, do not expect to save a few rupees second-guessing when you need it the most. The journey of life is too unpredictable for average customers to don the hat of actuaries. Like in stock markets, the best advice is to stay invested and not try to time the market. In insurance too, staying insured for longer periods may not be a bad idea.

(The author is the Founder and CEO of Upsure. Views expressed are the author’s own and not necessarily those of financialexpress.com).