Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior.

This article examines the introduction of a novel pay-as-you-go (PAYG) auto insurance contract in California, where 17% of drivers are uninsured despite a universal insurance mandate. The PAYG contract allows drivers to purchase minimum liability coverage in flexible increments of 3, 7, 14, or 30 days and to pause coverage on days they do not drive, thereby reducing upfront liquidity requirements. A randomized control trial found that offering the PAYG contract increased insurance take-up by 10.8 percentage points (an 89% increase) and days with coverage by 4.6 days (27%) over three months compared to traditional contracts, with demand showing relative price inelasticity. The study highlights that most applicants are severely credit constrained, with many forgoing bundle discounts for larger coverage quantities despite higher relative prices, indicating strong demand for smaller, more affordable coverage increments. Evidence suggests the PAYG contract is particularly effective in increasing coverage among drivers with no prior regular insurance history, pointing to its potential to improve market participation among underserved, low-income, or liquidity-constrained populations.