Pay-As-You-Drive Personal Auto Insurance

California private auto was changed forever in 1988 with the passage of Proposition 103.

Among other things the regulations provided that insurance companies must accept all good drivers (as defined by them) and rate auto on 3 primary factors: Driving Safety, Annual Mileage, and Years Driving (rather than age of driver).

(CONTACT ME FOR MORE CONTENT on the history of auto insurance in California)

Pay-as-you-drive insurance:

It is the limited number of categories for annual miles driven that catches the attention of regulators and others wanting a more refined rating plan. Number of miles driven seems like a reasonable way to measure exposure and is easily understood by policyholders. Presumably in combination with "where you drive" (territory, that is. Though this isn't "where you drive", it's "where you LIVE"), it would seem to cover a driver's exposure pretty well (see next section for what research shows).

The new proposed regulation is being touted as a "green" provision, encouraging drivers to drive less by having their insurance coverage apply by mile driven. California Insurance Commissioner Steve Poizner has proposed this optional rating mechanism, allowing insurers to offer a voluntary option for consumers who are interested in pay-as-you-drive coverage.

Consumer groups are opposed, saying that there is not enough protections in the law for protecting the privacy of insured's everyday activities. Some tracking mechanisms include "OnStar" satellite and GPS-based meters similar to those used in cell phones.

Quoting from the article:

The Environmental Defense Fund estimates that if 30% of Californians participate in this voluntary coverage, California could avoid 55 million tons of CO2 between 2009 and 2020, which is the equivalent of taking 10 million cars off the road. This would save 5.5 billion gallons of gasoline and save Californians $40 billion dollars in car-related expenses. Additionally, the California Air Resources Board has recommended the adoption of pay as you drive as one of the means to meet future climate change gas reduction targets.

Hard to ignore potential emissions reductions like these numbers.

But the research shows:

The research shows that pay-as-you-drive insurance may not get at the true exposure to auto insurance claims for each insured. The following table shows that annual mileage isn't one of the top three predictors of insurance claims. By the way, insurance score (or "credit" score) is not allowed in California.

Coverage	Factor 1	Factor 2	Factor 3
Bodily Injury Liability	Age/Gender	Insurance Score	Geography
Property Damage Liability	Age/Gender	Insurance Score	Geography
Medical Payments	Insurance Score	Limit	Age/Gender
Comprehensive	Model Year	Age/Gender	Insurance Score
Collision	Model Year	Age/Gender	Insurance Score

Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity, Michael Miller, FCAS and Richard Smith, FCAS, Epic Actuaries, June 2003

Pros/Cons of Pay-As-You-Drive:

Pros:

• Exposure for insurance tied to miles driven – easy to understand by drivers
  
• The amount you pay for insurance would be directly controlled by the driver, rather than on factors such as sex, age, martial status, etc. that the driver has no control over.
  
• The current proposal is for an optional credit, giving low mileage drivers a choice.
  
• Reduced emissions
  

Cons:

• The amount a driver pays should be as closely tied to his/her exposure to loss as possible, to avoid cross-subsidies and comply with Actuarial Standards and Principles.
  
• Tracking mileage is difficult and some methods proposed inspire fear of lack of privacy in some consumers and consumer watchdog groups.
  

My opinion is that there are better, less complicated ways to refine the rating plan options when it come to annual mileage, and still emphasize lower emissions and "green" policies. One obvious one is to simply increase the number of mileage bands in the current plans and offer "green" discounts (and debits) based on the type of automobile covered. Discounts for Prius's, debits for Hummers.

My firm would be happy to work with you to weigh your personal auto rating plan options and refine your plan.

Current events link:
Insurance Journal Article

Background/Bibliography
Powerpoint by Harbage
Powerpoint by Kelleen Arquette
AAA Review of Pay-as-you-drive report (EPA, 2002)