Young drivers could save hundreds of pounds on their insurance, claims a company that has just launched the latest pay how you drive product.

Instead of calculating the risk of you claiming and therefore your final insurance premium before you buy, Co-operative Insurance will fit a 'smartbox' into 17-25-year-olds' cars to monitor their driving to set a price (see the Cheap Car Insurance guide).

The insurer says the pay how you drive product could produce savings for over three quarters of young drivers with half expected to pay £328 less than typical competitor prices. But only those who drive well will make savings.

This type of insurance is not new but has not always proved successful. Aviva, for example, trialled pay as you drive insurance in the Noughties but scrapped it due to the high costs it paid to fit the boxes.

However, others see it as a welcome relief for young female drivers whose premiums are expected to rise following this month's EU ruling banning the use of gender when determining insurance pricing (see the Judges ban gender insurance news story).

Younger drivers pay more because they tend to have more accidents. The AA says the average 17 to 22-year-old pays £2,250 a year.

Young men pay more than young women because they have the most number of accidents, statistically.

How does the Co-op product work?

A device is installed either onto the dashboard or under the bonnet, and data measuring the following is transmitted via satellite:

  • Braking
  • Acceleration
  • Cornering
  • Speed
  • Time of driving

Customers first pay an annual premium, which the Co-op suggests will be an average £1,800, which includes the fitting of the box, although this figure will vary.

If, over the course of the year, customers demonstrate responsible driving they will receive a safer driving discount of up to 11.25% off the annual premium.

However, if a policy holder consistently drives badly, for example repeatedly breaking speed limits or taking corners too sharply their premium could increase by 15% from the initial price.

The product also allows customers to log into an online 'driving dashboard' to see how their driving is rated and giving advice on how they can improve.

Could this be the future of car insurance?

The AA says its smartbox version should be available at some point this year.

Ian Crowder, from the AA, says the EU ruling is likely to herald greater use of smart technology.

He says: "It will give the opportunity to base premiums on performance.

"Although it will probably be most beneficial to younger and perhaps some older drivers who struggle to get cheap premiums elsewhere as they represent the greatest risk to insurers.

"However, it will naturally favour the majority of female drivers while the more aggressive young male drivers will be less inclined to buy it, although it may help to temper their driving style."

Julie Townsend, director of campaigns at road safety charity Brake, says: "We welcome this new approach to encouraging young drivers to keep themselves and others safe.

"Persuading young drivers to make safer choices, like slowing down and avoiding night-time driving, is vital in preventing more lives being needlessly cut short on our roads."

Should you get pay as you drive policies?

Young drivers should first follow the MoneySavingExpert cost-cutting system, using the comparison services and trying to get cashback (see the Young drivers Insurance guide).

However, it's also worth checking these specialist policy costs in case they are cheaper.