Auto insurance is a necessary evil. You certainly don't want to buy any more than you need. It stands to reason that drivers who spend more time out on the road face a greater chance of mishap than those who log fewer miles. Yet - all other factors being the same - a driver who clocks fewer than 5000 miles a year will pay essentially the same premium as one who drives 50,000 miles a year. A solution is coming from pay-as-you-drive insurance, which, in its simplest form, calculates premiums based on miles driven.
Researchers Jason Bordoff and Pascal Noel of the independent Brookings Institution have extensively investigated pay-as-you-drive insurance and examined its implications. They have concluded that if all California drivers were to switch to pay-as-you-drive insurance, 64 percent of households would reduce their premiums, averaging a yearly savings of $276 per vehicle. The researchers maintain that, in an effort to cut their premiums, Californians would drive roughly 24 billion fewer miles every year and save 1.2 billion gallons of gas. In turn, there would be fewer accidents, lower emissions, and less congestion.
Already, GMAC Insurance offers discounts to low-mileage drivers, tracking driving distances through OnStar. Instead of per-mile pricing, discounts are based on the mileage bracket a customer falls into, with some drivers receiving discounts of up to 54 percent.
True pay-as-you-drive insurance launched in the United States in October from a startup company named MileMeter. MileMeter doesn't use technology to track mileage, instead relying on consumers to report their odometer readings accurately when prepurchasing blocks of insurance. MileMeter customers who drive farther than their purchased insurance do so without coverage.
But the pay-as-you-drive paradigm has critics and obstacles to overcome. High-mileage drivers, of course, would see rates go up. (Based on the Brookings calculations, 36 percent of households would pay an average of $393 more per vehicle.) The technology to monitor driven miles is expensive. And privacy advocates worry that programs that track your mileage could also record when you exceed the speed limit or use GPS to pinpoint your exact location.
That fear is not without merit. Progressive Insurance, for example, currently offers customers an optional coverage program, called MyRate, in eight states. It uses a small device plugged into a car's onboard diagnostic port to wirelessly transmit information provided by the car. Premiums are based not only on miles driven, but also on the time of day owners drive plus the number of sudden stops and starts drivers make. Until recently, time spent above 75 mph also was tracked.
"What we've uncovered is that driving behavior is even more powerful than mileage," says Richard Hutchinson, general manager of usage-based insurance at Progressive.
Progressive says the average MyRate customer earns a ten to fifteen percent discount over their conventional insurance premium. The company hopes to expand the program nationwide in 2009.
"We're on the cusp of a wholesale change in an industry that, for decades, has done things one way because that's the way we've always done it," says MileMeter CEO and founder Chris Gay. "We think we have a good shot at changing the industry over a long period of time."
The crucial question is: can this change be implemented without invasive electronic snooping? Paying by the mile is one thing, but having a digital tattletale riding along for every one of those miles is quite another.