Go back twelve months and there were a few experimental policies on offer for pay-as-you-drive (PAYD) policies. No one seemed to be taking them very seriously. Then, suddenly, they are being launched in more than thirty states with really high-profile campaigns in California. Why has this idea become so big so quickly, and is it actually good value for money?

To understand what's going on, let's go back to the essential nature of insurance. In a perfect world, we would be able to examine the detail of every person who wanted to buy insurance. This would allow the insurer to calculate a personal premium rate representing the very best guess as to whether this driver would be involved in an accident and make a claim. Unfortunately, once you sell policies to several hundred thousand people, the calculation is no longer personalized. Everyone is divided into broad classes and assumptions are generalized. That's why some people end up winners and losers. As we get towards the border between each class, some people end up on the wrong side and so may pay more or less than perhaps is strictly correct. In most cases we accept this because the amounts of money involved are quite small. But, to try rebalancing the calculation, insurers started to offer discounts.

If you are in a large class of drivers, you can claim one or more discounts to save money. So, for example, you can fit additional security to your vehicle and make it more difficult to steal. If so, your premium is reduced. The problem with some discounts is the level of trust involved. A claims assessor can always inspect a vehicle to make sure the owner was telling the truth. But it's far more difficult when you want to offer a discount to people who drive only a few miles a year and at off-peak hours. Because of their low mileage and the empty roads, they are less likely to have accidents than those who drive long distances everyday on busy highways. So how do you tell who is honest?

Welcome to the world of technology. Modern vehicles come with onboard computers, GPS systems, and transmitters. They can communicate with the insurers. Or owners can be given little black boxes to fit into their vehicles which will transmit the mileage, the time of day and the general area where the owner is driving. This rules out all the less than honest and gives a real discount to those who are safest on the roads. All you have to do is sacrifice some of your privacy. The leading Californian company expects to offer up to 40% in discounts to those with the lowest mileages. However you look at this, it represents cheap auto insurance for the seniors, homemakers and other low-mileage drivers. In effect, everyone pays a premium rate per mile. The technology can also watch how you drive. Those that drive with little acceleration and brake gently will pay less. Speed merchants who throw their vehicles around the roads, will pay more. If this is for you, get auto insurance quotes for PAYD policies. But if you really do drive a lot, stay with the conventional policy.