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Pay-Per-Mile Car Insurance: It's Coming.
Jeremy Faludi, 5 Jan 06

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How can you reward yourself for driving less? Or how can you make the costs people pay more closely match their impact on the world?

Car costs are largely divorced from car usage. Sure, you pay for gas as you drive, but for most cars, the average driver pays about as much for insurance as they do for gas; then there's the car's purchase price and maintenance. For the well-off, purchase price and maintenance can be ameliorated by leasing instead of buying. For low-income people, purchase price is as low as they can find, so insurance is often the biggest cost of having a car. Either way, insurance means being stuck with a fixed cost, no matter how much or how little you drive.

Well, not anymore. At least not in some places. Pay-Per-Mile, or Pay-As-You-Drive ("PAYD") insurance means that your insurance payments are based on how much you drive. Such plans have cropped up in places like the UK, Japan, and even a few US states. The Victoria Transport Policy Institute says that PAYD insurance will "help achieve several public policy goals including fairness, affordability, road safety, consumer savings and choice, and reduced traffic problems." Fairness will be improved because the user's financial costs will more closely match their accident risk--to say nothing of their burden on the roads, traffic, and the environment. Fairness between low-income and high-income drivers is also improved, because as the National Organization of Women's Cents Per Mile website details, low-income drivers often have to bear a higher insurance burden than their mileage or real accident risk warrants. Fairness between genders would even be improved--ever wonder why women pay less in car insurance than men? It's because on average they drive 40% less. (Though their discounts are not as big as their reduced risk.) Road safety and traffic will be improved by encouraging people to drive less, of course, and consumer savings and choice will be improved by giving people the option of using PAYD or staying with traditional all-you-can-drive plans.

Why would insurance companies want to offer discounts for people to drive less? Because if you look at the numbers, it works out in their favor: As Environmental Defense writes, "a 10% reduction in driving is estimated to result in a 17% decrease in crashes." Insurance firms' costs would decrease much further than their revenues. Why would insurance companies not want to offer it? NOW's Cents Per Mile site argues that it would expose some of the unfair pricing structures currently used. But proper marketing should be able to handle this, and smart pricing structures should allow them to improve profits while making pricing fairer. One of the biggest obstacles at this point is no one wants to be the first kid on the block, who has to work out all the kinks, then watch as the rest of the industry jumps on the bandwagon later; but again, good marketing should overcome this, by giving the first kid on the block a great reputation with green consumers (who are extraordinarily brand-conscious and brand-loyal).

Paying by mileage requires some technology to measure how much you drive. There are two ways of doing this: either installing a proprietary odometer that has an embedded phone to occasionally call in your mileage, or installing a GPS with embedded phone (like OnStar) to report your actual routes. Obviously, the latter is a huge privacy problem, and has raised stern objections from some groups. But public-policy-wise, it has advantages: it can charge you not only by how many miles you drove, but by where and when you drove them--driving in congested areas during rush hour costs you more than driving off-peak or in traffic-free areas. Whether these benefits outweigh the privacy concerns depends on who you ask.

So who offers PAYD, and how much would you save?

Plans differ, of course, but some offer as much as a 40% discount for people who drive significantly less than average. Norwich Union, the UK's largest insurer, has offered PAYD for about a year. Their system is GPS-based, charging by time and location as well as mileage. In Japan, Aioi has started offering it with an odometer-based system, according to Cascadia Scorecard. In the US, a pilot program was tried back in 1998 in Texas by Progressive Insurance Corp, though it has yet to be rolled out to normal consumers. It was originally GPS-based, but reportedly switched to odometer-based. In 2004, GMAC and OnStar supposedly partnered to make PAYD (or, as they call it, Mileage-Based Insurance) available in Arizona, Indiana, Illinois and Pennsylvania; however, I haven't been able to find places offering it, just the press release. Their system is / would be GPS-based.

How much will per-mile insurance change the world? The Victoria Transport Policy Institute does not expect PAYD to radically alter people's driving habits, but estimates a 5% - 15% mileage reduction if it were universally available in the US. Still, this is a significant impact, and it sets up the right incentive structure; perhaps over time people's habits would change more significantly. When we first mentioned this topic back in 2003, we quoted a Grist article saying: "Dean Baker, codirector the Center for Economic and Policy Research in Washington, D.C., has noted, mileage-based auto insurance 'may be the biggest free lunch around in reducing greenhouse gas emissions.'"

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Comments

This is a interesting perspective. I know that some insurance companies have been testing with a GPS like system that records speed, stopping distances, and other variables to determine if you are an agressive driver. Your insurance rate is then based on these ratings. I think this pay per mile ideal seems more attractive and also beneficial to the environment.

Other traffic policies and laws have also been in the news lately. One such idea is Stockholm's Traffic Tolls which require cars to pay a toll each time they enter a traffic center(city). The rates are based on time and traffic amounts. This policy will also help encourage drivers to possible consider mass transit. The article is highlighted over at Sustainablog (http://sustainablog.blogspot.com/2006/01/stockholm-testing-traffic-tolls.html)

With all these great ideas, one thing comes to my midwest-living mind. What other options are truly available. In America, I have always believed we are behind in providing mass transit, especially in smaller cities. Simply put, Americans love to drive and love their cars. Well now that these policies are popping up which can help change people's opinions and preferences, it is sad to see that some might not find an adequate mass transit system available when they seek a new alternative.

What ever happened to that huge public transit dream Seattle had approved? If I recall it got funding cut? It seemed very innovative, agressive, and well neat! Anyone have links to details on the project or news related to? Please share.

What an opportunity exists... If only some worldchanging would occur.


Posted by: Chad Weinman on 5 Jan 06

I also like this idea, for the general public at large. My mom drive like NEVER so it would be awesome for her...however, I drive a LOT, so I would prefer a fixed rate so that this doesn't kill me when I travel every weekend! It would be nice to have this option though.

And, I agree, I sure wish America would catch up on the public transit system.


Posted by: Narnia Nerd on 5 Jan 06

Recording speed and how often you brake could be used to figure out how congested the road is, without the same privacy concerns as GPS.


Posted by: rehana on 5 Jan 06

It's great to see that this approach to insurance is finally being taken seriously. There are gains to be made by all involved. The potential greenhouse gas emissions are enormous when you consider how much money governments outlay in order to gain very small reductions in Vehicle Kilometres Travelled (sometimes less than what would be achieved here according to The Victoria Transport Policy Institute).

There are also great gains for many applications that could be achieved using GPS to gain route information. Of course there is the privacy concern to overcome. If however, GPS position information was only recorded every few minutes or so, is this really giving anymore information than the cell phone currently does?

I wonder how much it costs to install all the vehicles with a GPS system and how easy it would be to roll-out on a large scale?


Posted by: Camden FitzGerald on 5 Jan 06

Sara Assicurazioni has been offering such a per-km contract for a few years now. The basic fee is half of the standard contract one and you pay as you drive. If you use your car for more then 15.000 km per year, the contract automatically turns into a standard one.

They use a GPS-based: since it can be used to localize the vehicle, they offer significant discounts on theft assurance too.


Posted by: Kitten Lulu on 5 Jan 06

The premise of the arguement is in error. High mileage drivers have far fewer accidents than low mileage drivers. Studies have shown this over and over again. This article was not based on new ideas. It is merely a rehash of articles written back in 1973 at the height of the first oil embargo. If high mileage drivers were the ones having the accidents, our economy would be in serious trouble. We would have no truckers, no salespeople, no couriers, and on and on.

The people who have accidents are mostly those without sufficient road experience, motor skills combined with poor judgement. If you don't have those things, you don't become a high mileage driver, you become a statistic.

Besides that, the insurance industry has not taken into account the main cause of accidents, especially fatal accidents. Extensive research has shown that flucuating blood sugar levels are the root cause of lethal momentary inattention - an intermittent Hypoglycemic effect that has been getting progressively worse parallelling refined sugar consumption. I have written extensively on this subject and my work has been reviewed by doctors, coroners and police all over North America.

This insurance gambit is without substance or merit and will only be taken seriously by the uninformed. Let's hope there aren't too many of those.


Posted by: John Newell on 6 Jan 06

Mr. Newell, I invite you to cite the "studies" you mention. As for the credibility of the research published by VTPI that I cited: it has also been cited in policy papers by the Delft University of Technology in the Netherlands, Politecnico di Torino in Italy and Imperial College London; and the Organisation for Economic Co-operation and Development, an international organization with 30 member-countries.

More facts and less random vitriol, if you please.


Posted by: Jeremy Faludi on 6 Jan 06

Sorry, but the best predictor of future accident risk is not miles driven, but past driving behavior. Although, other things being equal, more driving would equate to more accidents (you can't have an accident if you're not on the road), other things are far from equal. Very old people and very young people drive fewer miles but have much higher accident rates, because of differential skill and maturity levels.

Existing insurance policies already take account of mileage driven (every insurance company I've ever had asks me how many miles I drive each of my vehicles) and of location (through zip code based premiums). The commercial case for the new technique has not been made, I think.


Posted by: Michael Krauss on 7 Jan 06

Comments above reflect some of the most popular mistaken beliefs about driving, accidents, and auto insurance all of which are discussed on the website of the Now Insurance Project: www.centspermilenow.org.
As the originators of the per-odometer-mile cost analysis, NOW provides an authoritative, description of the operation of a per-mile insurance system,as well as a thorough critique of problems caused by the present system of charging insurance as a cost of car ownership instead of car use - the activity that creates insurance costs, and the only objective basis for measuring and charging for a car's on the road exposure to risk.


Posted by: Twiss Butler on 7 Jan 06

Mr. Krauss, you're right that if mileage were being used to replace other indicators, it would reduce actuarial accuracy; but if you follow the VTPI link (very first link in the article) and read it, you'll see they don't. You'll also see how currect mileage reporting in car insurance does not do the job, and how pay-per-mile is different. As Twiss Butler mentions above, there is also plenty of info to be had on the CentsPerMile site.

As for Mr. Newell, more facts and less invective, if you please. I invite you to cite the "studies" you mention. As for the credibility of the research published by VTPI that I cited: it has also been cited in policy papers by the Delft University of Technology in the Netherlands, Politecnico di Torino in Italy and Imperial College London; and the Organisation for Economic Co-operation and Development, an international organization with 30 member-countries.


Posted by: Jeremy Faludi on 7 Jan 06

I'd be all for this idea (especially as someone who tries to keep his driving to a minimum but gets reamed on insurance costs anyway)

Once we transition to pay-per-mile road taxes to suplement the flagging income from gas taxes (due to more efficient cars), it won't be any harder to add on a pay-per-mile insurance program as well. I wonder how long it will take for both of these to happen...


Posted by: Jesse Jenkins on 7 Jan 06

The fundamental problem with car insurance is nowhere else do they allow soo many idiots to operate so much heavy machinery all in one place.

So its not milage that matters but idiots per mile and lets face facts that number has been growing lately.


Posted by: wintermane on 10 Jan 06

Very interesting post. You said that people who drive in congested areas would end up paying more than people who drive in rural areas, but quite a large number of crashes, especially rollovers and fatalities, happen on rural roads, where speeds are usually much higher.

I think the system would have to be completely overhauled in order to implement pay-per-mile insurance, and it might end up unfairly penalizing people who have long commutes. It's quite complicated; there are so many factors that affect crashes that I can't imagine it being very fair.

I also wonder if the goliath that is the US auto insurance industry would ever go for it.


Posted by: Joanne Helperin on 17 Jan 06

This all sounds good but what about limiting the amount that someone can sue you by what kind of policy they have! I carry 100/300/100 with Uninsured/Underinsured etc...

I hit someone with say many state minimums of around 25K or so. I should not be responsible for any extra liability above there coverage.

Makes sense, because not only do I carry high coverage limits but I also carry an umbrella policy to cover any extra lawsuit to protect my assets. I pay out the nose to insure that someone doesn't have a field day which is happening more and more it seems. Isn't that odd that some people with little to nothing look forward to getting in an accident to be set for life? I don't agree with this way of thinking. Sorry but I work to hard to watch those who do nothing take it all away.


Posted by: John Ball on 18 Jan 06

If you have interest, you can find more information at http://terra.es/personal/smp00000/


Posted by: Salvador Minguijon on 21 Jan 06

The Insurance system has lagged behind for way too long with regards to an unfair and some what antiquated structure. In analysis it should be considered a Tax! As a vehicle owner driving however often or infrequent, you are forced by law to pay insurance liability and boy O'boy is it a liability in some cases.

The consequences for not carrying insurance are considerably heavy to the induvidual, who struggles to afford the cost or is caught without.
I see that the goverment and insurance companies deal hand-in-hand in a scheme that is corrupt to unfair in instances. I sure would like to be granted a permanent job or get business set for me for life, because the goverment made a "law" stating so. That's what I trully need. My temporary unemployment to being employed plays havoc on my finances to afford coverage. During periods of unemployment I drive very little.
Now, I believe in this new structure that must come about soon, I deeply feel so much that I am willing to include this insurance as a tax write-off. The people need to vote away this corrupt insurance system. I am trying in my own ways.


Posted by: Terence Carr on 22 Jan 06

Public opinion is a lever to move pay-per-mile insurance as an alternative plan. It doesn't cost much to use through newspaper, Internet newsrooms such as this one, email (no SPAM, please), tabloids, TV, cartoons, outrageous metaphors, memorable messages, jokes, and (most effective) word-of-mouth conversations.

As others already commented, don't forget to cite your sources.


Posted by: Rosemary Althoff on 23 Jan 06



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