Pay As You Drive Auto Insurance

[M II A II R II K]

At all income levels, most drivers would save money if they paid for insurance by the mile


http://www.streetsblog.org/2011/01/...-you-drive-insurance-which-could-cut-traffic/

http://www.brookings.edu/~/media/Files/rc/papers/2008/07_payd_bordoffnoel/07_payd_bordoffnoel.pdf

It could reduce driving statewide by more than eleven percent, put money in the pocket of two-thirds of the state’s motorists and put little to no strain on the government budget. That sounds-too-good-to-be-true idea is called pay-as-you-drive insurance, and the city DOT is looking into how it might work in New York.

The idea is simple. Right now, most car insurance policies cost the same whether you drive 500 miles in a year or 50,000. While some of the costs of car-ownership change based on how you drive, like fuel or maintenance, insurance doesn’t. If insurance premiums rose with every mile you drove, it would be one more incentive for drivers to keep the mileage down.

In fact, it would be a pretty hefty incentive, according to a 2008 Brookings Institution report on the subject. They found that if all drivers paid for insurance by the mile, total driving would drop by eight percent. That’s the equivalent of gas prices jumping by $1 per gallon, but in the form of a carrot, not a stick. In New York State, where insurance premiums are high, they estimated it could provide an 11.5 percent reduction in driving.

There’s also a big market for pay-as-you-drive insurance. As you’d expect, those who drive more also tend to crash more and cost the insurance companies more. In essence, low-mileage drivers subsidize high-mileage drivers on average. With pay-as-you-drive, insurers could lure away the low-cost drivers with lower rates, a win-win for both those groups.

And because of the uneven distribution of miles driven, two-thirds of drivers nationwide would save money under a pay-as-you-drive system, according to the Brookings report. Since lower-income drivers tend to drive shorter distances already, the distributive effect of the policy is also progressive, according to Brookings.

So why isn’t pay-as-you-drive already more popular? One reason is technology: in the past, it was difficult to accurately track how far people drove. With both electronic odometers that are harder to tamper with and GPS devices, however, measurement isn’t a big obstacle anymore.

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[winway]

It is undoubtedly a great way for the people like me who drive very less and who is looking to get low on their premiums. Infrequent drivers may find usage-based coverage more cost effective. Other people who can benefit include younger drivers who are usually charged higher premiums for standard car insurance as they fall into a high-risk group. Drivers with a history of making claims may also be charged more. In these cases, the PAYG model may help lower costs.

Those considering a PAYD policy should make sure to look at all of the advantages and disadvantages first. This may suit some drivers, but others may find it too limiting and not cost effective. In some cases a pay how you drive product that rewards safe driving may be an alternative worth considering. Specialist eco-insurance policies that offset emissions may also suit those who worry about vehicle damage to the environment. As with any insurance coverage online auto quotes may be another way of saving money.

 

[EnviroTO]

Definitely the amount of driving many users do would be reduced and money saved by drivers who drive less. However, the cost per kilometer paid on average would likely go up as a result because while an undriven car is less likely to crash it is probably at least as likely to get stolen or broken into. I see pay as you drive insurance as having higher administrative costs as well unless vehicles were outfitted with some sort of technology at manufacture that tracked when the car was on or off much like the technology installed into AutoShare vehicles.

 

[kEiThZ]

I wouldn't support this personally. It would be brutal for somebody like me. I drive 25 000km per year. And 80-90% of that is driving long distance between Ottawa and Toronto. Yet, I'd be penalized for driving that much, despite the fact that most of the time my car is in my condo's basement gathering dust. I can even go a week or two without using the car, and just relying on transit. So my car is mostly safe. And when it's in motion, a lot of the times it's transiting along a corridor that tends to be safer than the average city street.

I see this as an excuse for the insurance industry to jack up rates. And it does not necessarily make actuarial sense. Where you drive the car (traffic, road conditions, speed limits, etc.), the experience of the driver, crime rate in the area, etc. are all likely to have far higher impacts on the probability of the insurance company paying out than the sheer number of kms put on.

The only exceptions may be those with very low rates (as compared to the norms of about 20k per year) of driving (< 10 000 km) or those with very high rates of usage (say > 25 000 km). I'd suggest that somebody who uses about 10 000 km driving solely inside the 416 and parking on the street regularly is probably a bigger insurance risk than a driver who uses his car to do 20 000 km between Toronto and Montreal and parks his car mostly in a garage at home or in a workplace lot. The latter may only use his car 40 times (or 20 round trips) in a year. That's actually a very short amount of time that the car is exposed to more risk.