Fact Pack

“This is a creative approach to one of the most pressing environmental issues we have – air pollution. Air pollution is a matter of human health. It kills people.” – Oregon Senator Charlie Ringo, speaking in support of Oregon HB 2043, which provides a tax incentive for insurance companies to offer PAYD insurance as an option.(1)

The Concept

Unlike conventional auto insurance policies, which charge a flat rate based on time periods, pay-as-you-drive (PAYD) auto insurance policy costs are based on usage or distance driven. PAYD policies still incorporate traditional rate factors like driver history, location, age, and vehicle type. The premium costs added to those factors is simply calculated per-mile or per-minute – the more you drive, the more you pay to be insured. PAYD policies reward drivers who use their car less, which has the potential to reduce traffic congestion, collisions, and vehicle emissions while increasing the number of insured drivers.(2)(3)

The cost to policyholders can be calculated and collected by offering prepaid mileage systems, where motorists pay for mileage ahead of time, based on miles they expect to drive in a year, or by independently measuring mileage at particular intervals. Calculations of mileage can be made by installing a global positioning system (GPS) or radio frequency identification devices in policyholders’ cars, or based on reported mileage from certified mechanics. Both mechanisms have been used in pilot tests, and there is no evidence that reliance on certified mechanic reports is any less reliable than GPS-type methods.(2)

Using mechanic verification would likely incur much lower costs than installation of GPS-type systems. However, these systems are becoming increasingly common standard and optional features on new-model cars, and offer added benefits like directions and emergency calling to their users. Some PAYD pilot participants have expressed privacy concerns over the amount and quality of the information collected by GPS-type systems, which may make mechanic mileage verification a favorable option. Radio frequency devices are similar to GPS systems but are less expensive and present fewer privacy concerns because they only track mileage, not vehicle location.(2)

The Demand

Market research and requests to participate in pilot programs which offer PAYD have indicated strong consumer interest in PAYD policies. A UK pilot study by Norwich Union wanted 5,000 subjects to test their pilot program and received more than 6,000 requests for participation before officially announcing their project.(4) According to a Norwich Union survey, nine in ten people say they would prefer their motor insurance to reflect the usage of their car and the type of journeys they make – with the majority favoring pay-as-you-go systems similar to those offered by gas and electricity suppliers.(5)

Progressive Casualty Insurance Corporation, which ran a pilot study in Texas from 1998 until 2000, reported that the PAYD option was very popular with participants, who saved an average of 25% over their previous insurance policies.(6)

As of January 2003, 10,000 people had pledged their support for PAYD insurance through the Environmental Defense website.(7) The Oregon Environmental Council has been building a database of customers interested in PAYD insurance and has more than 1,000 pledges so far.(8)

The Costs

Although most insurance companies have not been adamantly opposed to PAYD policy options, very few have implemented them regardless of tax incentives, legal allowance, or customer demand. Most companies claim that the initial and ongoing costs of developing and installing GPS-type monitoring devices are prohibitive. However, research data has shown that odometer audits would be just as effective as GPS tracking and, like other metered data such as electricity, would not significantly increase costs.(2)

Individual insurance companies are also wary of PAYD policies because they may reduce long-term profits by reducing gross premiums. However, the expected increase in the number of insured drivers and decrease in the number of insurance payouts for accidents and accidents against uninsured drivers would likely well make up the difference in lower premiums.(9)

The Regulatory Barriers

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

Respondents 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.(10)

The Benefits

“The economic incentives provided by PAYD have the potential to provide significant trip-reduction benefits while actually lowering total social costs through crash and injury rate reductions.” – Georgia Institute of Technology, in their report, “Commuter Choice and Value Pricing Insurance Incentive Program”

Health and Safety

Researchers estimate that PAYD plans could reduce driving 10-20%. Although mileage is just one of several factors that affect crash rates, a 10% reduction in driving is expected to reduce crashes by 17%.(11) Higher-risk motorists would pay higher per-mile fees and have the greatest incentive to reduce their driving, potentially making the roads a safer place for all drivers. An overall reduction in driving would result in reduced traffic congestion, road and parking facility costs, accident risk, pollution emissions, consumer costs, and urban sprawl.

The U.S. Department of Transportation estimates the health effects of air pollution from motor vehicles costs $40 to $65 billion annually.(3) Considering this staggering cost, states should have an interest in policies that encourage consumer choice while reducing costs.

Many motorists now forego insurance on certain vehicles due to its prohibitive cost. Some low-income motorists cannot afford the insurance and others just don’t consider it cost-effective to insure a seldom-used, low-mileage vehicle. PAYD would allow these motorists to afford insurance, which would reduce the number of uninsured motorists on the road and the societal costs associated with collisions involving uninsured persons.

Equity

Compulsory insurance seems to work in upper-income zip codes where most people can afford to keep insurance on cars that are driven less than average. Because these cars cost insurers proportionately less in claims, they bring in extra profits and insurers privately call landing their business “skimming the cream.” Insurers use extra profits from “cream” customers to compete by holding car insurance policies down for their preferred customers who have many other insurance needs. Customers typically skimmed and overcharged are those who commute by carpool, bus or bicycle, and also women, older people, and households with more cars than drivers. – Statement by Deborah Bell, President, Texas National Organization for Women(2)

The quote above highlights how traditional auto insurance policies discriminate against women, the elderly, and those who seek to reduce consumption and save money by using alternative transportation. In addition, insurers who use time-based pricing policies often charge more for motorists who live in low-income areas that tend to have higher crash rates or more frequent theft reports.

Conventional auto insurance schemes overcharge low-risk and low-mileage drivers in order to provide affordable insurance to high-risk drivers. Lower-income motorists tend to drive significantly less than higher-income motorists, and increased driving (mileage) equals increased risk of accidents. PAYD policies stop these forced subsidies and base costs on the true risk to the insurer.(2)

Environment

PAYD policies simply and logically reward low-mileage drivers by charging them less money in return for less auto use, which results in tangible environmental benefits.

The typical driver travels 14,000 miles annually, but gas consumption varies widely. If your car is averaging 20 miles per gallon, then you are using about 700 gallons per year. Combustion from car operation converts this into approximately 14,000 pounds, or 7 tons, of CO2.

Automobiles account for more than 25% of greenhouse gas emissions in the United States. Research expects widespread adoption of PAYD policies to reduce driving by 10-20%, resulting in significant decreases in greenhouse gas emissions and resulting global climate change and air pollution.(10)

In addition, reducing automobile use reduces our use of, and dependence on, finite oil resources. This point is especially important considering recent concerns over U.S. dependence on foreign oil. Transportation in the U.S. accounts for 68% of the nation’s petroleum usage, which suggests that even a moderate decrease in driving and fuel consumption could result in substantial petroleum savings.(10)

Driving less causes less stress on our cars, and may increase the expected lifetime of a car. Making cars last longer means less space required to dispose of retired cars and parts.

Finally, conventional auto insurance pricing encourages an all-you-can-drive attitude because policyholders have already paid a flat rate no matter how much they use their cars, causing an incentive to maximize consumption to get their money’s worth. PAYD insurance pricing reflects the true costs that driving imposes, gives consumers an incentive to limit consumption, and rewards them with lower costs.(2)

Sources:
(1) “Fewer Miles, Cheaper Insurance in New Bill.” The Oregonian. 20 June 2003.
(2) “Pay-As-You-Drive Vehicle Insurance: Converting Vehicle Insurance Premiums Into Use-Based Charges.” Victoria Transport Policy Institute. Updated November 10, 2003. 17 March 2004 <http://www.vtpi.org/tdm/tdm79.htm>.
(3) Testimony of Michael A. Replogle, Transportation Director, Environmental Defense. “Financing Transportation: Wise Stewardship Demands a Level Playing Field.” Congressional Joint Economic Committee. 6 May 2003. Joint Economic Committee. 17 March 2004 <http://jec.senate.gov/democrats/Documents/Hearings/replogletestimony06may2003.pdf>.
(4) “Case Studies.” IBM. 17 March 2004 <http://www-1.ibm.com/services/ondemand/norwichunion.html>.
(5) “Pay As You Drive™.” Norwich Union. 17 March 2004 <http://www.norwichunion.com/pay_as_you_drive/index.htm>.
(6) “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/>.
(7) “Pay-As-You-Drive (PAYD) Auto Insurance.” Environmental Defense. 18 December 2002. 17 March 2004 <http://www.environmentaldefense.org/article.cfm?contentid=2205>.
(8) “Pay As You Drive Insurance.” Oregon Environmental Council. 17 March 2004 <http://www.orcouncil.org/Pollution/PAYD.htm>.
(9) Guensler, Randall and Jennifer Ogle, Georgia Institute of Technology, School of Civil and Environmental Engineering. “Commuter Choice and Value Pricing Insurance Incentive Program.” Submitted to the U.S. Department of Transportation, Federal Highway Administration. Project End Date 14 October 2004. University of Minnesota, Hubert H. Humphrey Institute of Public Affairs, State and Local Policy Program. 17 March 2004 <http://www.hhh.umn.edu/centers/slp/projects/conpric/projects/gawk.pdf>.
(10) 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>.
(11) “NEW Facts: Pay-as-you-drive car insurance.” Northwest Environment Watch. 17 March 2004 <http://www.northwestwatch.org/reforms/PAYD_facts.pdf>.