Car Insurance that Costs Less When You Drive Less

This post is by Michael Replogle, Transportation Director at Environmental Defense Fund.

Think back to your last all-you-can eat buffet. Did you eat more than you would have ordering à la carte? The same applies to driving and car insurance. With insurance policies giving almost no consideration to miles driven, if you drive an average amount or less compared to other drivers in your neighborhood, you pay much more per mile for car insurance than high-mileage drivers, which are in the minority. Yet accident risks are clearly linked to miles driven.

Shouldn’t your insurance premium correspond to your risk, saving you money if you drive less? That’s the idea behind Pay-As-You-Drive (PAYD) Insurance – drive less, pay less. Pricing insurance by the mile not reduces premiums for the majority of drivers, but if universally available, would cut traffic by 8 percent, with corresponding reductions in greenhouse gases, air pollution, congestion, and oil imports.

Those are the findings of a new report on PAYD by the Brookings Institution’s Hamilton Project, which reveals the unfairness of current insurance pricing. Two-thirds of households would save money from PAYD, with those households saving on average 28 percent or $270 per car per year. Low and moderate income families would benefit the most because they are disproportionately represented among low-mileage drivers. Miles driven closely corresponds to income.

PAYD Concerns Addressed

Some have raised privacy concerns about PAYD insurance because some insurers propose using Global Positioning System (GPS) devices to obtain information. GPS devices can track where, when, and how aggressively people drive, in addition to mileage. But basic PAYD insurance needs only periodic certified odometer readings, which can be obtained during periodic inspections or through devices that transmit only mileage.

Still, there’s a good argument for GPS-based systems. Aggressive drivers who often accelerate and decelerate rapidly are not only more accident-prone, but produce more greenhouse gases and air pollution, and use more fuel. Why should calm drivers subsidize the insurance premiums of aggressive drivers who endanger lives and harm the environment?

To address privacy concerns, GPS-based PAYD insurance can be kept voluntary, so only motorists who choose to save more by driving calmly will opt into these extra cost-saving plans. But I expect many Americans would choose it. GPS-based PAYD is no more intrusive than toll transponder tags, cell phones, and credit cards – technologies that are widely accepted for their convenience, even though they can reveal information about our behavior. Current law generally protects this data from unreasonable disclosure.

Another concern about PAYD is that it might discriminate against rural families who have to drive more, compared to urban drivers. But this concern is unfounded. Premiums still would be risk-adjusted for other factors, and urban driving is riskier than rural driving. The average mileage rate for rural drivers still would be far lower than for urban drivers. A person is classified as a high or low mileage driver relative to others in the same rating area.

A minority of all drivers account for a disproportionate share of all driving in urban, suburban, and rural areas. The Brookings study finds that a majority of drivers in each of these areas and in every income group would save money under mileage-based insurance.

Making PAYD Available to All

PAYD has been successfully implemented in Israel (Aryeh), the Netherlands (Polis), the United Kingdom (Coverbox), South Africa (Hollard), Canada (Aviva), and Japan (Aioi). In the U.S., PAYD is available though Progressive Insurance (the MyRate program, which is rapidly expanding) and GMAC Insurance (OnStar program), but not in every state. Other companies are preparing to launch PAYD products in the U.S. market in the coming year.

(This GMAC calculator lets you estimate your savings.)

But many state regulations do not permit PAYD – either by outright prohibition or conflicting requirements. Michigan, for example, requires that premium charges be stated upfront. California requires that insurers price auto policies according to driving record, miles driven, and years of driving experience, in that order.

California is working on eliminating these barriers. A bill to allow PAYD, A.B. 2800, passed 72 to 2 in the Assembly, and is expected to pass easily in the State Senate as well. Plus California Insurance Commissioner Steve Poizner has taken up the torch, and is pursuing PAYD programs through regulatory changes.

For PAYD to take off in the U.S. it needs regulatory support at the state level. But it also needs funding and stronger encouragement at the federal level. From the Brookings report:

There is a lack of knowledge on the part of insurance firms and state regulators about how to price and design PAYD, significant start-up costs involved with being a first mover, and barriers to potential entrants. Given the small private benefit but large social benefit from PAYD, a booster shot from the government may be needed for an insurance firm to offer it, which may then push other firms to follow suit.

PAYD pilot programs currently receive several million dollars a year in funding through the federal Value Pricing Pilot (VPP) program, but this isn’t enough. The recently proposed Blumenauer bill (see my previous post) includes PAYD as one of the transportation choices eligible to receive funding. Another bill introduced by Rep. Gerlach (H.R. 2296) encourages PAYD through start-up tax credits for insurers that offer PAYD policies.

States need federal funding support to identify and eliminate regulatory barriers to PAYD insurance. It would be money well spent. PAYD, with its incentives to drive less, is one of the most readily available strategies to cut fuel consumption and greenhouse gas pollution while saving consumers money.

At a time of $4 a gallon gas, increased support for PAYD should be part of any economic stimulus package that Congress enacts to fight high gas prices.