Pay-as-you-drive auto insurance gains traction

Pay-per-mile car insurance is being debated in California.

In 2001, the Texas Legislature passed a bill called HB 45 that allowed insurers to offer auto insurance on a per-mile basis.

Texas was the first state to legalize pay-as-you-drive PAYD) insurance, and California may soon become another. State insurance commissioner Steve Poizner has stated his support for PAYD auto insurance; it is fairer for consumers, he says, and encourages biking, walking, and other low-impact modes of transport.

Poizner recently authorized insurers to verify the mileage of policyholders' cars. This can be done in myriad ways; smog check stations, Department of Motor Vehicle records and repair shops could take note of cars' mileage. Or cars' mileage could be tracked via GPS.

The first auto insurer to offer PAYD was Texas-based MileMeter. The company offers insurance in six-month blocks with a certain number of miles attached. If a driver exceeds her mileage allotment, she can log on to MileMeter's website and load more miles on. Drivers who underutilize their insurance receive a "rollover" of remaining miles to the next billing period - minus the minimum earned premium of 1,000 miles.

And, beginning September 15 of this year, the company instituted a new policy of photographic mileage verification. Policyholders take a digital picture of their odometer and submit it to MileMeter. New customers must do this three times over the course of their six-month policy; returning customers only have to do it once every six months.

In a September interview with Tech Decisions magazine, MileMeter CEO Chris Gay said, "We think half the market currently is being overcharged for auto insurance and getting mediocre service." Gay and four others in the insurance industry were lauded by the magazine as "IT All-Stars."

"If you can't explain to your customers how you arrived at the price in one sentence," Gay added, "you shouldn't be selling the product." The pricing transparency inherent in MileMeter's policies helps consumers understand that driving more costs more and will lead them to drive less, he said.

A 2008 study by the Brookings Institution correlates Gay's claim. The study's abstract suggests that typical auto insurance is "inefficient and inequitable," equating it to an all-you-can-eat buffet. Because policyholders' costs are the same no matter how much they drive, there's an incentive to drive to excess - just as a buffet eater has no economic reason to curb his food consumption. And, under the current system of insurance, low-mileage drivers are subsidizing high-mileage drivers.

When drivers pay for car insurance on a per-mile basis, though, they see a correlation between mileage and the cost of their car insurance. Brookings suggests that national PAYD insurance would lead to 8 percent less driving, reducing "carbon dioxide emissions by 2 percent and oil consumption by about 4 percent." In addition, estimates Brookings, two-thirds of households would pay less for insurance if they had PAYD.

PAYD "reduces accidents, decreases traffic congestion, improves the environment ... and [decreases] the nation's consumption of oil," concludes the study.

Under California commissioner Poizner's plan, the onus of developing competitive PAYD policies would fall on insurers. He believes that competition and innovation are the best change motivators. But, cautions MileMeter CEO Gay, "Our industry is incredibly bloated and Byzantine." No one has tackled the auto insurance industry's challenges and effected reform, he says, but those challenges "should be tackled at some point."

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Posted: November 05, 2009

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