Research Of Pay-As-You-Drive On The Car Insurance Market

In recent years, with the increasing of car ownership in China, the auto insurance is developing rapidly in our country. At present, it has become the biggest coverage of the property insurance business in our country. Inconsistent with the high proportion of premium income and market share in property insurance business, auto insurance does not have an optimistic profit. There are many possible reasons of this phenomenon, the unreasonable pricing is a common cause so that accurate pricing is a crucial way to improve poor earnings of auto insurance.Premiums of auto insurance were calculated by combining data on risk level which was determined by risk factors, such as driver risk, car risk and regional risk. The study found that there was still serious information asymmetry in the auto insurance market, it shows that the existing risk factors does not cover all the risks and we should add other necessary risk factor to improve market efficiency. At the same time, some scholars pointed out that there is a significant positive correlation between the mileage of the vehicle and road traffic accidents. Then, could the information asymmetry improved if we add mileage to pricing factor in the auto insurance market?The auto insurance which adds the mileage of car to pricing factors was called Pay-As-You-Drive (PAYD) in the world insurance market. There are a lot of countries and regions have developed PAYD in recent years and accumulated certain experience in practice. Could the introduction of PAYD improve market information asymmetry and enhance market efficiency? How to develop PAYD products for auto insurance market in China? This paper will research these two issues.In this paper, the theoretical model will focus on the first question. To compare the market equilibrium of PAYD with the market equilibrium of original, we will prove that PAYD can improve information asymmetry phenomenon in auto insurance market, and achieve more accurate risk classification. Then, based on the conclusion of theoretical model, this paper will discuss the practical experience of foreign system of PAYD, analysis how to pursue PAYD system in our country and develop PAYD products for auto insurance market in China, provide feasible suggestions for the government, the insurance industry, relevant institutions to promote PAYD auto insurance system.