Consumer Attitude For PAYD Insurance Commerce Essay

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"Consumers are often able to choose among various price structures. For example, diners can often choose between all-you-can-eat and a la carte restaurant pricing. Similarly, telephone service purchasers can choose between flat rates that allow unlimited use, or rates based on the number of calls or minutes used. Consumers sometimes prefer a flat rate's predictability and low unit cost, and other times prefer the affordability that comes from paying according to how much they use" (Litman, 2005, p.35).

According to Motor Insurance Bureau (MIB), "Britain's roads are among the most congested and slowest in the world. We own more than thirty millions cars between us and the chances are that we will be involved in up to ten motoring accidents during our lives". It is compulsory to have at least third party insurance coverage before one attempts to drive. According to bb.co.uk (2005), cost of motor insurance has doubled in the last ten years despite the fact that, it is already highest among other European countries. The cost of annual motor insurance for teenage drivers is as high as it can cost almost half of the value of a brand new small size car.

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Motor insurance premium normally depends on driver's experience, location and type of vehicle in use. Every year, insurers review drivers' record and increase or decrease premium depend on number of accidents or claims made against the insured. Drivers pay the price for every mistake or get reward as low premium for safe driving. Prior to introduction of Pay-As-You-Drive (PAYD) insurance policy, there were three different types of insurance policies available. Drivers could choose between third party only, third party fire and theft and fully comprehensive insurance according to their personal needs.

"With conventional pricing, motorists pay a fixed premium for unlimited mileage coverage. Current vehicle insurance pricing significantly overcharges motorists who drive their vehicles less than average each year, and undercharges those who drive more than average within each price class (Edlin, 1999; Litman, 2001). With current unlimited-mileage pricing, premiums for higher-risk motorists appear unreasonably high, considering that driving is virtually a necessity for most people." (Litman, 2004, p.10)

"Pay-As-You-Drive insurance is relatively new concept for pricing auto insurance premium. Under this concept, an insurance company would allow customers to purchase insurance on a per-mile basis, rather than fixed yearly or semi annual premium, using verified mileage information. The per-mile rate for an insured household would be based on recognized risk factors, such as driving record, age, gender, location, and vehicle characteristics. Therefore, a driver with the history of accident would pay more per mile than a driver with a perfect record, all else being equal. The key difference from current insurance policies is that the cost of coverage would effectively relate to how much a vehicle is driven, and turn what is currently a fixed cost for drivers into a variable cost"( Funderburg et al, 2003, p.34).

1.1 - Research Hypothesis

"Motivation is the driving forces within the individuals that impels them to action" (Schiffman & Kanuk, 2007, p.83). Schiffman and Kanuk (2007) also mention that consumers are not always aware of the reason for their actions. Motivational research attempts to discover underlying feelings, attitude and emotions concerning product services, or brand use. It is reasonable to assume that consumer always attempt to select alternative that, in their view, serve to best satisfy their need. Therefore objectives of this research are to reveal underlying consumer preferences for Pay-As-You-Drive insurance over fixed monthly unlimited mileage insurance. This research will aim to understand consumer wants and needs for PAYD insurance and to establish consumer perception of its characteristics.

1.2 - Proposed Research Objectives

The objectives of this research are to unveil consumer attitude for PAYD insurance compare to fixed monthly unlimited mileage insurance. Therefore, the objectives are:

1-To discover and estimate the extent, which the customer will buy Pay-As-You-Drive (PAYD) insurance

2-To establish how customer evaluate the Pay as You Drive insurance compared to fixed monthly insurance

3-To find out the consumer perception of PAYD insurance

Literature Review

PAYD was first proposed in Maryland in the early 1970s (Wenzel, 1995, p.6). "Advocates for PAYD insurance come from many backgrounds, from citizen groups lobbying for more equitable auto insurance pricing to environmentalists hoping to improve air quality through more efficient transportation pricing. From a resource economics perspective, PAYD insurance has the potential to significantly improve the efficiency of the transportation system by sending the correct price signal to the consumer." (Guensler et al, 2003, p. 32)

2.1 - PAYD and Consumer Benefits

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"PAYD insurance offers many consumer benefits. In addition to saving money and giving consumers greater control over their insurance costs, it makes often confusing insurance costs easier for consumers to understand. Per-mile pricing makes insurance more affordable to lower-income drivers since they could choose only to insure a given number of miles" (Funderburg, 2003, p. 36).

"The policy is pay-as-you-drive (PAYD) insurance, which is motivated on the grounds of reducing mileage, particularly by high-risk drivers, and reducing the number of uninsured drivers by lowering premiums for low-mileage vehicles. Under PAYD, auto insurance companies would switch from annual lump-sum premiums to premiums levied on annual miles driven, scaled by a driver's rating factor (which would vary with age, crash record, and region). By converting some of the fixed costs of vehicle ownership into costs that vary with mileage, the policy reduces the distance that vehicles are driven and thereby reduces fuel demand. And unlike under higher fuel taxes, driving costs (fixed plus variable) for the average motorist do not increase; hence political opposition to this policy should be more muted" (Parry, 2005, p.4).

2.2 - PAYD and Environmental Benefits

"The benefits of PAYD insurance extend beyond consumers' wallets. By creating an incentive to drive less, PAYD would reduce traffic congestion, air pollution, greenhouse gas emissions and U.S. dependency on foreign oil. Moreover, reduced driving would be expected to reduce vehicle crashes, improving the overall safety of our transportation system" (Funderburg, 2003, p. 36).

"In addition to reducing the average automobile insurance premium, PAYD may help reduce fuel consumption, CO2 emissions, and vehicle miles travelled (CO2 are directly correlated with fuel use). General consumer response to a per mile or per gallon surcharge would be similar. In the short run, both a per mile and per gallon surcharge would provide an incentive for drivers to take fewer trips or use different modes of transportation. In the long run, both surcharges would encourage drivers to change the location of their home or workplace; a per gallon surcharge would give consumer an additional incentive to purchase more fuel efficient vehicles. The long run response for either surcharge would be much stronger than the short run response. Although, many studies have analyzed the impact of a fuel tax on auto purchase and use, very few have examined the impacts of a PAYD system" (Wenzel, 1995, p. 34).

2.3 - PAYD insurance and its Weaknesses

"Some critics of PAYD have argued that annual miles driven, or its proxy gallons of gasoline consumed, are not good predictors of the likelihood a driver will be involved in an accident. Several studies suggest otherwise; in particular, one recent California study indicates that location, miles driven and driving record are the best predictors of accident frequency and severity. Other critics are concerned that a PAYD system would reduce auto safety, by lowering insurance costs for teenagers, and thereby encouraging them to drive more (teen are recognized as one of the riskiest classes of drivers). This would only pose a problem if most of teen are not currently driving. However, it is likely that many, if not most, teen are currently driving, possibly either uninsured or on their parents' policy. A properly designed PAYD system, which would increase the per-gallon cost of driving, may in fact act to discourage teen driving.

PAYD may have a negative economic impact on several classes of drivers, including uninsured, low-income drivers and high-mileage drivers, such as commercial and rural drivers. Rural drivers, who typically have to drive farther to access in sparsely populated areas, would likely pay more for coverage than urban drivers under a PAYD system. Some rural driver may even pay more for insurance than they do under the PAYD policy". (Wenzel, 1995, p.36)

Research Methodology

Methodology is a practice or a system, which carries out a research process. It gives a concept of conducting research on a particular area. This section gives an overall view of research methods and why specifically those methods were, chosen as well as the advantages and disadvantages related to those methods and the limitations.

The aim of this project is to find out the factors which motivate various types of drivers to buy Pay-As-You-Drive insurance and more specifically, to find out whether cost and environmental effects has an influence on this decision.

3.1 - Research Plan

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Malhotra & Birks (2006) classify research designs into exploratory and conclusive types. Conclusive research further breakdown into descriptive and causal research designs. Both exploratory and descriptive approach can be used in this research project as objective of this research is to determine who, what, when, where and why customer buy particular product.

Therefore, I will use exploratory research method for personal in-depth interviews with industry experts such as insurance brokers. The aim of exploratory research will be to understand consumer buying motives and possible factors for their attitude. This will be followed by descriptive research design where the impact of these motives will be identified directly from consumer.

"Descriptive research is characterised by the prior formulation of specific research questions and hypothesis. Thus, the information needed is clearly defined. As a result, descriptive research is pre-planed and structured". (Malhotra and Birks, 2006, p.65) Due to limited prior information on consumer motivation for PAYD insurance it is not ideal to begin with descriptive research method however once desired information is gathered, it will be suitable to employ descriptive research method.

Casual research method is used to get an evidence of causality and, to determine the nature and strength of variables' effect. Casual research is similar to descriptive research and, requires a planed and structured design. At this stage of the research project, cost and driving pattern has been identified as factors for PAYD insurance deals however there is need to explore others variables.

There is danger of collecting great quantity of data but has little idea what to do with it, if I begin with descriptive or casual research methods. Without exploring further into this topic, there is possibility of designing poor questionnaire and not getting right or desired information for this project. Webb (2002) suggests that it is important to begin with exploratory research when researcher has little information about the problem. It can be followed by descriptive or casual research. For example, hypothesis developed via exploratory research can be statistically tested using descriptive or casual research.

Data collection for research will be qualitative as well as quantitative. Qualitative research will base on the secondary data collection. The qualitative research focuses less on the quantifiable measures and analysis, and more on the key factors such as making decisions. Ideally, qualitative data is used to provide background information of industries and markets in terms of trends, dynamics and structure. Another reason for collecting qualitative data is, it helps in interpreting data collected by various sources.

The most extensively used technique in quantitative research is surveying. Surveys can be conducted by personal interviews, post, telephone, fax and email. Moreover, personal interview can be self administered or person administrated. For this kind of research, person-administered survey method is appropriate because respondent does not require answering confidential questions such as personal hygiene. The benefits of using person administrated method are that it is cost effective and reliable.

3.2 - Questionnaire Design

"A questionnaire is a method of obtaining specific information about a defined problem so that after analysis and interpretation, result in a better appreciation of the problem" Chisnall (2000, p.134).

The important part of research process is designing a questionnaire which addresses the needs of the research being conducted. "Questions should be specific; they should be related to particular aspect of survey and ask for information in well defined terms" (Chisnall 2000, p.137).

Questionnaire can be both self administered and structured interviews. Self administered questionnaire are basically, completed by the respondents. It can be delivered and returned electronically in the form of emails, posted online so that the respondents answer the questionnaire and send it back. Responses of the structured interviews are generally recorded by an interviewer on the basis, of each respondent answers. Personal interviews are a way to collect in depth and comprehensive information. The advantage of personal interviews is that you get instant answer. Postal surveys will not be used because response rate is slow. Telephone surveys are not suitable because it restrict to time limit and creditability of respondent.

Questionnaire will be designed to uncover consumer attitude toward Pay-As-You-Drive insurance compare to fixed monthly unlimited mileage insurance. A five point likert scale will be used to determine, how consumer evaluate PAYD insurance and to investigate the consumer level of agreement for PAYD.

3.3 - Data Collection

Secondary data is a data which is collected by the researcher to understand the problem. It also helps to design strategy and test the hypothesis. Conversely, primary data is originated by the researcher for the solution of specific problem (Sekaran, 1998, p.189). A list of secondary data is available below (including list of references) however it is not exhausted.

3.4 - Limitations

Malhotra & Birks (2006, p64) suggests to use exploratory open ended questionnaire for identifying relevant or salient behaviour patterns, beliefs, opinions, attitudes and motivations. Malhotra & Birks (2006, p225) also points out that survey method for identifying motivational factors can be difficult to obtain required information. This is because respondents may not be aware of their motives for buying specific product, brand or services.

Despite its limitations, the survey approach is the commonly used method for primary research collection in marketing research. I personally feel comfortable with survey method for this research however if any problem occurred, I will be shifting to alternative method.