The system depends on a "black box", which is smaller than a DVD case and is installed either in the boot or passenger area of a customer's car. The box records real-time vehicle usage and sends the data securely to Norwich Union using similar technology to that used by mobile phones.
Five thousand Norwich Union customers are road-testing the technology, in a trial that is due to last for two years.
Robert Ledger, programme director for the scheme, said, "We believe this initiative is a major breakthrough in the development of more tailored motor insurance premiums enabling us to treat all drivers as individuals."
According to the insurance giant, the system is ideal for the safety and security-conscious motorist, as it has the ability to locate a vehicle in the event of theft and in future will provide instant notification of accidents to the insurer. Future enhancements such as panic buttons and real-time route planning could also feature in the longer term.
Motoring group the AA welcomed the initiative as a means of exploring new ways of reducing crime and improve insurance charging but warned that drivers would need to carefully consider the implications before they sign up. These include, said the AA:
Insurance premiums are currently calculated carefully, based on risk, driver experience, post code and so forth - mileage represents only a small element of what constitutes premiums;
Unexpected increases in mileage (i.e. change of job or need to visit a sick relative) could significantly increase premiums, which could make budgeting difficult;
There is not necessarily a relationship between mileage and accident claims. This means that some low mileage motorists (urban drives, school run etc) may suffer a disproportionate accident / mileage ratio. Drivers are 10 times more likely to be involved in injury accidents during the school run than on a long motorway drive;
The system may encourage drivers to undertake higher mileages just to avoid 'high risk' roads;
Motorists may be penalised for diversions out of their control - for example, closed motorway diverting traffic on to 'high risk' roads;
Drivers will need some kind of map or on-board system which tells them the cost of roads they are intending to use;
There is a 'big brother' element - many drivers may be unhappy about their insurance company always knowing where they are;
It may be possible for the technology to be breeched for criminal purposes;
Dishonest drivers could compromise the equipment;
While the technology will track where and when a vehicle is being driven, it may not be able to identify two drivers carrying different risks - such as mother and teenage son.
But these concerns are not universally shared. According to Robert Ledger, "The interest in the pilot scheme has been phenomenal. We could have filled the pilot twice over with the amount of requests we've had from interested motorists, not just within the UK but from drivers around the world."