Pay as You Drive Insurance Is Changing How Low-Mileage Car Owners Pay for Coverage

The Realisation About My Second Car

My family's second car — a five-year-old hatchback used mostly for school runs and occasional weekend trips — was covered by the same annual comprehensive insurance premium as a car that might cover 15,000 km a year. I was paying a flat own damage premium for approximately 4,200 km of actual annual use. When I discovered Pay as You Drive insurance and used a car insurance calculator to estimate what PAYD would cost for my usage pattern, the comparison was striking: my annual own damage premium under PAYD would be roughly 60 percent lower than the flat annual premium I was currently paying.

What Pay as You Drive Insurance Is

Pay as You Drive insurance is a usage-based motor insurance model where the own damage component of the premium is charged per kilometre driven rather than as a flat annual rate. The mandatory third-party component remains a fixed annual tariff as set by IRDAI — PAYD only applies to the own damage element of the policy. A telematics device installed in the vehicle or a smartphone app tracks the mileage driven, and the own damage premium accumulates based on actual kilometres. The per-kilometre rate typically ranges from Rs 0.50 to Rs 1.50 depending on the insurer and vehicle type. Driving behaviour — measured by acceleration patterns, braking smoothness, and speed profiles — can generate additional discounts of up to 25 percent on the per-kilometre rate.

How IRDAI Enabled Pay as You Drive

IRDAI introduced the regulatory framework for Usage-Based Insurance in India through a circular in 2020, allowing insurers to offer telematics-linked motor insurance products. This was a significant policy shift that enabled Indian insurers to offer products that price risk based on actual driving behaviour and distance rather than proxy variables like vehicle age and geographic zone. Since the framework was established, several major Indian insurers and insurtech companies have launched PAYD products. By 2026, PAYD is available from multiple insurers with different telematics implementations — some requiring a physical OBD device plugged into the car's diagnostic port, others using a smartphone app.

Using a Car Insurance Calculator for PAYD Comparison

Using a car insurance calculator to compare PAYD options against standard annual policies requires knowing the vehicle's actual annual mileage. Most people significantly overestimate how much they drive — tracking actual daily distances for a month, or checking the odometer from last service, provides a realistic figure. For a vehicle covering 5,000 km annually at a per-km rate of Rs 1.00, the own damage premium component under PAYD would be Rs 5,000. The same vehicle's standard annual own damage premium might be Rs 10,000 to Rs 14,000 — a saving of Rs 5,000 to Rs 9,000 annually. For low-mileage drivers, PAYD consistently produces better outcomes than flat annual premiums.

The Safe Driving Bonus: An Additional Premium Reduction

Beyond the mileage-based premium reduction, PAYD policies that monitor driving behaviour offer a further discount for safe driving patterns. Smooth acceleration from stops, gentle braking rather than hard stops, maintaining appropriate speeds, and avoiding sharp lateral movements all contribute positively to the driving behaviour score. Insurers using telematics data to score driving behaviour can offer discounts of 10 to 25 percent on the per-kilometre base rate for consistently safe drivers. For a driver who already drives carefully, this represents an additional premium benefit on top of the mileage-based saving — the insurer passes on the actuarially lower risk of a safe driver through a lower effective premium.

The Top-Up Model for PAYD Policies

PAYD policies typically work on a prepaid or subscription model: the policyholder purchases a defined number of kilometres upfront (say, 5,000 km for the year). When the kilometre balance runs low — typically when 80 to 90 percent of the purchased km have been driven — the app sends an alert to top up additional kilometres. This model requires some attention to maintain continuous coverage: if the purchased kilometre balance runs out before the top-up is processed, the own damage coverage could lapse for the excess distance driven. Most PAYD providers have built safety mechanisms into their apps to prevent inadvertent coverage gaps, but policyholders should understand the top-up requirement and manage it proactively.

Who PAYD Is Best For

Pay as you drive insurance provides the most value for specific driver profiles. Second cars used primarily for short, local trips — school runs, nearby errands, weekend outings — that cover well under 8,000 km annually benefit most from the mileage-based premium structure. Individuals who primarily use public transport for daily commuting and use the car occasionally are strong candidates. Retirees whose driving patterns have reduced significantly from their working years pay standard annual premiums that no longer reflect their actual usage — PAYD realigns the premium with current reality. Remote workers whose daily commute has been eliminated by work-from-home arrangements face the same misalignment between flat premiums and reduced usage.

Conclusion

Pay as You Drive insurance is a genuinely useful product for low-mileage car owners that aligns premium cost with actual vehicle usage rather than charging a flat annual rate regardless of how little the car is driven. For the right usage profile — particularly second cars, occasional-use vehicles, and retired drivers with reduced mileage — PAYD can reduce the own damage premium by 40 to 60 percent while maintaining the same coverage quality. Using a car insurance calculator to compare PAYD rates against standard annual premiums for the specific vehicle and mileage profile takes five minutes and reveals whether the saving is material enough to justify the switch.