Background

Citing a need for fairness and environmental protection, various interests have been calling for pay-as-you-drive (PAYD) insurance for many years. Several pilot programs testing the feasibility and benefits of PAYD have been, or soon will be, initiated.

Progressive and “Autograph”(1)

The Progressive Casualty Insurance Corporation began testing its usage-based auto insurance product “Autograph” in Houston in 1998, and expanded the program throughout Texas in August of 1999. A unique rating methodology developed and patented by Progressive, using retrofitted Global Positioning Satellite (GPS) and cellular technology, was used to record and collect data. Data was collected by an independent vendor, as required by Texas law, and forwarded to Progressive for billing. Drivers were charged according to amount of time, time of day, and place of driving. This method allowed drivers to save money by spending less time in their vehicles, especially during congestion periods when trips take the most time.

The test confirmed that usage-based (PAYD) insurance was technologically feasible and popular with participants, who saved an average of 25% versus what they were previously paying. Customers liked having control over their insurance costs.

Progressive discontinued selling new policies in April 2000, but continued to service existing usage-based policies until July 15, 2001, when the company discontinued the program. The costs involved were prohibitive because of the small number of policy holders. However, according to Mauricio Duarte, Internet Service Specialist with Progressive, the company is committed to the concept, but has no immediate plans to reintroduce the product.

Norwich Union Corporation (UK)(2)(3)

Norwich Union, a United Kingdom insurance company, recruited 5,000 customers to participate in a pilot program which began in late 2003 to test the benefits of and demand for PAYD insurance and associated services.

The company will collect data using a “black box” installed in participant vehicles, a technology developed by IBM. Using technology similar to that used for mobile phones, the “black boxes” will relay to Norwich Union information about how often, when, and where a vehicle is driven. Monthly insurance payments will be calculated from that data. Policyholders will pay a monthly premium to cover the basics like fire and theft protection, and then will pay itemized add-on charges reflecting vehicle usage.

Norwich Union believes this method of calculation will ultimately result in fairer premiums and provide the customer greater control, flexibility, and choice. Response to the online registration for the pilot has been overwhelming and the company expects to receive more than the required number of volunteers.

According to Robert Ledger, program director for Norwich Union, “Customers choosing Pay As You Drive™ insurance will benefit from individual premiums based on how often, when and where they actually used their cars. Motorists would receive a fairer deal as this initiative provides them with the opportunity to really be in the driving seat when it comes to controlling their premiums.”

By December 2004, Norwich Union and IBM expect to have tracked the driving habits of the pilot study’s 5,000 participants. Armed with these insights, IBM and Norwich Union plan to conduct usage and risk analysis studies to refine the insurance billing process and create a comprehensive business model. The companies hope to launch Pay As You Drive™ in the UK in 2005.

Georgia(4)

The Federal Highway Administration’s Value Pricing Pilot Program is providing funding for a before/after PAYD insurance simulation pilot in Georgia. After gathering baseline data the pilot will provide payments to participating households that reduce vehicle mileage (VMT), and thus their crash exposure. In a second phase, payments will be provided to households that reduce all crash exposure factors (VMT, risky driving behavior, and driving in dangerous corridors and at risky times).

Massachusetts(5)

The Environmental Insurance Agency, a subsidiary of the Conservation Law Foundation, has partnered with the Plymouth Rock Assurance Corporation and is offering policies to members of the Transportation Alliance, a “green” buying club that brokers discounts on environmentally-friendly products. They are attempting to accumulate data proving that low-mileage drivers cost less to insure, with the intent of petitioning insurance regulators in Massachusetts to authorize a PAYD program.

Other Initiatives(6)

A number of groups, including the U.S. Environmental Protection Agency (EPA), Environmental Defense, and the Conservation Law Foundation, are working together to form a national cooperative of insurance providers who are willing to establish steep discounts for low-mileage drivers – a fairly significant step toward PAYD.

The EPA is also developing a voluntary government-industry partnership to offer recognition and support to PAYD insurance-offering companies.

The EPA has also been considering giving out green “stamps of approval” to companies that offer PAYD policies, a program similar to the one which recognizes energy-efficient products with an Energy Star® label.

Regulatory Issues(7)

A 2003 survey by the Georgia Institute of Technology reported that some states’ insurance regulations prohibit insurance companies from selling per-mile premiums. Their survey of insurance commissioners in 43 states found that 63% believe state regulations would not prohibit PAYD insurance, while 37% reported their states’ regulations would prohibit PAYD insurance options.

The insurance commissioners who responded to the survey offered reasons why their state regulations prohibit PAYD policies, and research indicates that most of these could be overcome by a properly structured PAYD program. In West Virginia, for example, regulations require that customers be insured at all times, and PAYD might mean that drivers would lose coverage if they exceeded the prepaid number of miles. To overcome this barrier, an insurer could structure a PAYD program to ensure that participating drivers are never uninsured.

How to Implement

The National Organization of Women posts model legislation which mandates that insurance companies must offer consumers a choice between time-based and mile-based premiums. This is intended to serve as a model for federal legislation but could easily be modified to serve as a state model. There are some difficulties in mandating PAYD options for private insurance companies in a particular state. Insurance companies in any given state are unlikely to be affiliated with the state, and most private companies dislike state law interference in how they offer private services.

In addition, pilot studies of PAYD programs indicate they carry an initial higher cost to insurance companies, a burden that the state may be reluctant to mandate. However, most pilot study reports indicate that the higher costs are associated with the installation and monitoring of new technologies like GPS or “black box” systems to measure mileage and driving location. These costs are unnecessary if insurance companies opt to allow licensed, independent mechanics to verify mileage. This would also solve the problems that arise from customers’ privacy concerns relating to systems that monitor their driving. The cost of this option would be negligible to the insurance company, similar to the cost of other private monitoring services like gas gauging in private residences.

Most existing or proposed legislation regarding PAYD either simply allows insurance companies to offer mile-based rating plans in addition to time-based rating plans (Texas, Georgia) or offers tax incentives for companies that do offer the choice (Oregon) in order to offset the initial higher costs of implementing PAYD programs. The sample bill in this package is modeled after Oregon’s HB 2043.

Sources:
(1) “Project XL: Progressive Auto Insurance.” U.S. Environmental Protection Agency. Last updated on Thursday, April 25th, 2002. 17 March 2004 <http://www.epa.gov/projectxl/progressive/>.
(2) “Pay As You Drive™.” Norwich Union. 17 March 2004 <http://www.norwichunion.com/pay_as_you_drive/index.htm>.
(3) “Case Studies.” IBM. 17 March 2004 <http://www-1.ibm.com/services/ondemand/norwichunion.html>.
(4) “Value Pricing Pilot Program.” U.S. Department of Transportation, Federal Highway Administration. Page last modified on September 11, 2002. 17 March 2004 <http://www.fhwa.dot.gov/policy/13-hmpg.htm>.
(5) “Developing Pay-Per-Mile Auto Insurance.” CFL Ventures, Inc. 17 March 2004 <http://www.clfventures.org/eia.html>.
(6) “Pay-As-You-Drive (PAYD) Auto Insurance.” Environmental Defense. 18 December 2002. 17 March 2004 <http://www.environmentaldefense.org/article.cfm?ContentID=2205&Page=1>.
(7) Funderburg, Keri, Michael Grant, and Ed Coe. “Changing Insurance One Mile at a Time.” Contingencies. November / December 2003. 17 March 2004 <http://www.contingencies.org/novdec03/changing.pdf>.