NORWICH Union, Britain’s second-biggest car insurer, will launch a pay-as-you-drive (PAYD) policy before the end of the year, after a three-year pilot of the system that promises to reduce dramatically the costs for safe drivers.

Simon Machell, the chief executive of Norwich Union Insurance, predicted that at least half of all UK drivers would be interested in the new product, after 5,000 drivers agreed to take part in the oversubscribed pilot.

NU’s decision to open the premium-setting pricing system to all customers is part of a wider trend towards PAYD as a new method of taxing vehicles and cutting road accidents among young drivers.

Last month Douglas Alexander, the Transport Secretary, pushed the Cabinet to find time in the next parliamentary session to pass legislation allowing the UK’s first PAYD road pricing scheme.

The Government hopes that a PAYD scheme, which would see motorists charged for driving in city centres and trunk roads, will cut congestion and reduce environmental damage. The Transport Department is looking at the possibility of using PAYD technology developed by insurers in its pilot.

Meanwhile, last month More Than, the insurer, introduced a PAYD scheme for young drivers, which reduced the premiums charged to inexperienced motorists as long as they drive only in daylight hours.

Mr Machell said: “We’ve been trying to get the technology and infrastructure right, which has been challenging because we’re breaking new ground. But we’re excited about it because it’s a totally different way of selling insurance. People will start to understand exactly what they’re paying for, which could potentially change the way insurance is done.”

In 2003 5,000 drivers volunteered to have “smart boxes” fitted to their car engines in order to take part in the oversubscribed pilot. It enabled NU, which insures one in every seven UK drivers, to compile information on the safest driving habits. “We think at least half of all the UK’s drivers will be interested in PAYD,” Mr Machell said. “We had so many people who wrote in and asked to take part in the pilot, we set up a regular newsletter for pay-as-you-drive fans to keep them updated on developments.”

PAYD works the same as mobile phone technology, with a fixed monthly fee plus costs based on the number of miles driven. A smart box with a GPS tracking system is installed in the car’s engine and relays real-time information to a central computer that enables NU to calculate premiums based on how, where and when the car is used.

NU has not yet decided whether to charge users for the smart box but plans to send an engineer to the policyholder’s house to fit it.

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