Drive less, pay less for insurance

What if your car insurance rates were tied to the number of miles (or hours) you drove, so the less you drive, the less you pay?

That is what pay-as-you-drive (PAYD) insurance pricing does — on top of the usual pricing factors, it links premiums to how much you use your vehicle.

Giving a discount to low-mileage drivers makes sense. Imagine if you didn’t pay for gas when you filled up your car, but instead you paid for gas every six months based on the average driver's gas usage. That is basically how traditional car insurance is priced, and it offers no incentive to cut down on driving.

Good for your budget, the environment and safety

The more you drive, the higher risk you have of being involved in an accident. More driving also adds to traffic congestion and pollution. Mileage- or usage-based insurance provides a strong incentive to drive less, helping to ease congestion and reduce tailpipe emissions while preventing accidents and saving you money.

A recent Brookings Institution report estimates that if all motorists bought accident insurance per mile, rather than conventional, lump-sum insurance:

• Driving would decline by 8 percent nationwide, translating into a savings of about $50 billion to $60 billion a year in driving accidents and other car-related damage.


• Total U.S. carbon dioxide emissions would go down by 2 percent and oil consumption by about 4 percent, helping to stabilize our climate and reducing America's dependence on foreign oil.


• Two out of three households would pay less for auto insurance, with each of those households saving an average of $270 per car.

PAYD auto insurance is one of the most important tools available to policy makers quickly to cut global warming pollution from driving. For example, in September 2008 the Maryland Climate Commission recommended PAYD insurance as one of the most potent ways to cut traffic-related greenhouse gas emissions.

PAYD should be an option for all drivers

PAYD insurance is available in some form in 34 states and in many foreign countries including Israel (Aryeh), the Netherlands (Polis), United Kingdom (Coverbox), South Africa (Hollard), Canada (Aviva) and Japan (Aioi).

Given its many benefits, why isn’t PAYD universally available in the U.S.? One reason is that many state insurance regulations do not permit PAYD — either by outright prohibition or conflicting requirements. North Carolina, for example, requires that premium charges be stated upfront, which precludes PAYD charges since they vary according to miles driven.

California is now working on eliminating its barriers to PAYD insurance. The state's insurance commissioner Steve Poizner recently announced his intention to draft new regulations to allow usage-based insurance.

Texas recently became the first in the nation to have a "by the mile" choice of auto insurance offered by MileMeter. Traditional insurance offers 15 percent or less mileage-based discounts that don’t typically capture the full benefit of driving fewer miles.

Which insurers offer low-mileage discount rates?

Insurers are slowly moving in this direction. Several major insures offer partial pay-as-you-drive insurance, including:

• Progressive Insurance offers up to a 60 percent discount for low-mileage drivers through MyRate program (in Alabama, Kentucky, Louisiana, Maryland, Michigan, Minnesota, New Jersey and Oregon).


• GMAC's OnStar program offers up to a 54 percent discount for low-mileage drivers in dozens of states (see calculator to estimate your savings). Other companies are planning to launch PAYD products in the U.S. market in the coming year.

How does low-mileage insurance work?

There are a variety of ways that PAYD insurance policies can be tailored to consumer and insurance needs. For example, premiums can be set:

• within specific ranges of miles driven (along with other rating factors),


• by the mile driven (along with other rating factors), or


• by hours or miles driven, with adjustments made for time, location, speed or driving style (along with other rating factors).

Options for pricing also include premiums for shorter policy periods (such as one month, rather than 6-12 months) or premiums based on mileage rather than a fixed period.

Monitoring mileage can be accomplished in a number of ways, including certified odometer readings, upload of on-board computer data, GPS-based meters with periodic reporting or pay-at- the pump technologies.

Privacy and fairness are maintained

Your driving patterns are still private. Basic PAYD insurance requires only periodic certified odometer readings, which can be obtained during inspections or through GPS devices that transmit only mileage.

Some insurers have introduced PAYD policies that use GPS to track mileage and driving behaviors, such as braking and acceleration, so insurance companies can set rates based on these factors where permitted by law and agreed to by the consumer.

Aggressive drivers who often accelerate and decelerate rapidly are not only more accident-prone but produce more pollution and use more fuel. These programs allow higher risk drivers to reap the benefits of improving their driving habits right away, making insurance more affordable.

GPS-based PAYD insurance is voluntary, so only motorists who choose to save more by driving cautiously will opt into these extra cost-saving plans. Additionally, options are available that protect the disclosure of the consumer’s location and driving behavior data to the insurance company. For example, premiums can be calculated with location-anonymous pricing systems designed to keep no memory of the transaction nor associate data with drivers or vehicles.

Rural drivers won’t be penalized. Rural drivers might log more miles, but they won’t be penalized compared to city drivers. PAYD premiums are still risk-adjusted for other factors, and in general, urban driving is riskier than rural driving. The average cost per mile for rural drivers would still be far lower than for urban drivers. And in addition, a person is classified as a high- or low-mileage driver relative to others in the same area.