Telematics in Motor Insurance: PAYD and PHYD Explained

Telematics-based motor insurance is transitioning from a niche experiment to a mainstream product category in India. As of May 2026, more than 14 insurers have filed telematics-based insurance products with IRDAI, signaling a fundamental shift in how motor risk is priced and managed.

Understanding the Two Models

Pay-As-You-Drive (PAYD): This model ties insurance premiums directly to the distance traveled. Vehicles that are driven less pay lower premiums. PAYD is particularly relevant for India, where a significant portion of personal vehicles are used sparingly — data from vehicle telematics suggests that 30-40% of private cars travel fewer than 5,000 km annually.

Pay-How-You-Drive (PHYD):> A more sophisticated model, PHYD uses driving behavior data — acceleration patterns, braking intensity, cornering speed, time of driving, and adherence to speed limits — to assess individual risk. Safe drivers earn significant premium discounts, while aggressive driving patterns lead to surcharges.

The Data: What Telematics Has Revealed

Early adopters, particularly in the light commercial vehicle (LCV) fleet segment, have produced compelling data. Fleet operators using telematics-based insurance have reported:

Frequency reduction of 15-28% in claims frequency among LCV fleets that adopted telematics-based policies. This is a substantial improvement, driven primarily by driver behavior modification — when drivers know their behavior is being monitored, they drive more carefully.

Severity reduction of 6-14% on Own Damage (OD) claims. Telematics-equipped vehicles tend to be involved in less severe accidents due to reduced speeds and better braking behavior.

Predictive lift of 30-65% from telematics features compared to traditional rating variables alone. This means telematics data is significantly better at predicting claims than age, vehicle type, and location — the traditional rating factors.

AIS-140: The Infrastructure Backbone

The AIS-140 standard, which mandates GPS-enabled intelligent transport systems in commercial vehicles, provides the telematics infrastructure backbone. Originally implemented for public transport and goods carriers, the AIS-140 device ecosystem is now expanding to personal vehicles.

These devices capture real-time location, speed, acceleration, and braking data, which can be shared with insurers (with policyholder consent) to enable usage-based pricing. The cost of AIS-140 devices has fallen to Rs 3,000-5,000, making them economically viable even for two-wheeler insurance applications.

Regulatory Framework and Privacy

IRDAI's sandbox framework has facilitated telematics product innovation, allowing insurers to test and refine products before full-scale launch. However, the regulatory framework is still evolving, particularly around data ownership, consent requirements, and the extent to which telematics data can influence pricing.

The Digital Personal Data Protection (DPDP) Act, 2023, imposes strict requirements on the collection, processing, and storage of personal data, including driving behavior data. Insurers must obtain explicit consent, provide opt-out mechanisms, and ensure data is anonymized where required.

The challenge for the industry is to balance the actuarial benefits of telematics with privacy concerns. Consumer advocacy groups have raised questions about surveillance, data sharing with law enforcement, and the potential for telematics to become a tool for behavioral control rather than fair pricing.

Outlook

Telematics-based insurance is expected to account for 5-8% of the motor insurance market by FY28, growing to 15-20% by the end of the decade. The combination of falling device costs, improving data analytics capabilities, and regulatory support creates a favorable environment for adoption.

For consumers, the promise is straightforward: safer driving rewarded with lower premiums. For insurers, telematics offers the holy grail of motor underwriting — individual-level risk assessment rather than group-level proxy rating.