As the global oil and gas crisis deepens and gas prices hit the roof, car owners are desperately looking for options to reduce their fuel bills. The most popular solutions appear to be either public transport or car pools, or even city biking. However, such fuel-saving measures have had little impact on auto insurance coverage because despite them, vehicle owners are still paying for full auto insurance coverage, which seems unfair, as all of us would agree. Basically, auto insurance has come to mean a fixed cost, no matter how much or how little one drives.
Given this scenario, a lot of insurance companies are now looking at new insurance schemes that "reward" customers, as it were, for reducing fuel consumption and car usage and give them a chance to actually save on gas prices. Trial schemes have already been introduced in some states and the new programs are being called either PAYD (pay as you drive) auto insurance or pay per mile auto insurance.
So how does the program work? In simplest terms, pay per mile auto insurance means that your insurance payments are based on how much you drive. That's the most basic aspect of this scheme, but there are, of course, numerous clauses and sub clauses that we can't discuss in detail here. However, it would be fair to say that pay per mile auto insurance is designed to make both car owners and insurance companies happy. For the former, this kind of insurance ensures that they don't pay full coverage rates even though they drive less. It particularly seeks to protect the interests of low-income drivers, who often bear a higher insurance burden than their mileage or real accident risk entail. Pay per mile auto insurance would make auto insurance more affordable for such drivers by giving them more control of the premiums they pay on their auto insurance policies.
For the insurance companies, discounts for people who drive less makes compelling sense because the numbers say it all. A survey conducted by the New York-based Environmental Defense has found that a 10% reduction in driving approximately results in a 17% decrease in auto accidents. Need we say more? Obviously, for insurance companies, their costs would decrease much more significantly than their revenues. So why would they not want to offer PAYD insurance?
The same study has found that not only will pay per mile auto insurance help car owners save money, but also reduce pollution, once again for obvious reasons. Because PAYD demonstrates the financial benefits of driving less, it is estimated that it will reduce driving and congestion by at least 10%, according to Environmental Defense.
Now there's one final question to be answered. How does an insurance company figure out how many miles a car is doing? In other words, how does the system guard against unscrupulous car owners who may try to fiddle with their odometers? The answer is: by installing a proprietary odometer carrying an embedded cell phone that regularly reports your mileage to your insurance company. An alternative to this would be to install a GPS device into an embedded phone to track your actual routes.
Though using GPS technology raises privacy infringement issues, the advantage here is that not only does the system track your mileage, but it also records where and when you drive. So, if you travel in an overcrowded area during peak hours it may cost you more, but you could save on this by driving during off-peak hours.
All of which sounds wonderful, but we have to say that this is still "testing the waters" time, because no company has actually gone ahead and declared that it will launch the scheme for others to imitate and perhaps improve upon. Of the trial programs currently underway in the US, one involves OnStar, who has tied up with a national insurance company. Discounts are offered to motorists who drive less than 15,000 miles per year - the lower the mileage, the more the discount. However, the program is only available in Arizona, Indiana, Illinois and Pennsylvania.
The other program, being tested in Minnesota, is for drivers who own a 1996 or older model. A matchbox-sized electronic device is plugged into the car owner's onboard diagnostics (ODBII) port. A sensor within the device detects how much and when the vehicle is in use and at what speed it is driven. This information is then used to calculate the discount.
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