Pay-As-You-Drive Auto Insurance
Pay-as-you-drive auto insurance is the term now commonly used for usage-based programs that offer drivers the option of having customized premium rates.
The idea behind usage-based programs is to give drivers a financial incentive to drive less and, depending on the information that is monitored, to drive more carefully. The more positively they react to the incentive, the less they pay for their auto insurance. (With commercial programs, the fleet owner benefits through a lower premium.)
At their simplest, usage-based programs record the actual miles driven, offering those who drive less than average a lower rate. A growing number of auto insurers are offering more complex programs that also take driving behavior into account. These use a telematic device installed in the car to relay information about when and how a car is being driven. Policyholders who tend to drive at less risky times of the day and whose driving habits reflect an awareness of road safety receive a lower rate.
There are basically two types of usage-based products: simple mileage based programs, under which the odometer is checked at the end of the policy period or mileage is monitored by a technological device installed in the vehicle, and performance-based programs, under which the device collects information about the driver’s behind-the-wheel behavior such as speeding or sudden braking that may show a disregard for, or a lack of familiarity with, safe driving behavior. Some devices register the time of day the car is driven—rush hour, for instance, which, due to the density of the traffic and drivers’ reaction to it, is one of the riskier times to drive.
Using the number of miles driven and a driver’s safety record to help calculate auto insurance premiums is nothing new. Both are taken into account in calculating premiums for traditional policies. With traditional policies, drivers are generally asked by their insurer when they apply for a policy, and periodically throughout the period that they remain insured with the same company, to estimate the number of miles they drive each year. However, many underestimate mileage and some may overestimate it. Usage based programs provide continuous updates on mileage.
As for a driver’s safety record, it has always been a significant factor in the ultimate price of coverage but unless the price goes up significantly after an accident or speeding ticket, drivers do not always link price to the way they drive. But telematics technology provides immediate feedback to the individual driver about the riskiness or his or her behavior and therefore may be more successful in changing bad habits.
- Discounts: In April 2013 ISO, an insurance industry data and predictive analytics company that provides products and services to help measure and manage risk, announced that it had filed its first vehicle telematics-based rating rule in 33 states. The optional GeoMetric rating rule for personal and commercial automobiles uses information collected via telematics to award discounts for vehicles operated in areas that are determined to be safer than the locations in which they are garaged. The rule had been adopted by 19 states as of April 3, 2013.
- Expansion of Interest: A study by Towers Watson published in March 2012 found that at least seven of the top 10 auto insurance companies in the United States have implemented usage-based programs in at least one state and that companies representing more than 75 percent of the market have developed or are in the process of developing usage-based programs. Most companies are rolling out their programs slowly, state by state, since each state’s insurance department has to review the details of the plan submitted and approve it.
- Washington State now allows insurers to offer usage-based auto insurance policies. Legislation to permit such a program was reintroduced after stalling in the previous session. The sticking points for insurers had been trade secret protection for electronic devices and other sources of information, the data gathered from them and the usage-based component of the auto insurance rates filed with the state’s insurance department. Under the agreement, information contained in a usage-based auto insurance filing, whether derived from a recording device or system or business method, will be kept confidential.
- More than a year ago, insurers urged lawmakers in the state to enact legislation that would protect the usage-based models and technology as proprietary information, but the bill failed to pass. One insurer with usage-based products testified at the time that it had spent millions of dollars developing the programs and wanted its research and development to be protected from competing insurers. A five-year statewide pilot program is in its third year.
- In Michigan, the insurance department reminded insurers that the state’s insurance code allows companies to offer mileage-based auto insurance policies, based primarily or solely upon average miles driven, either weekly or annually or on a daily or weekly commuting basis.
- New York City is soliciting information from interested parties about usage-based programs that could be implemented in New York State and the City in the hope of reducing congestion and hence pollution. Specifically, it wants to know whether there are legal, regulatory, financial or technical issues that would pose a barrier to implementation; what would have to be done to make such a program successful; and the role that government can play in the development of a market for such products, among other things. For insurers, the cost of implementing a usage-based system poses the greatest barrier to developing one.
- Massachusetts has also expressed an interest in usage-based programs. The state plans to reduce greenhouse gas emissions to 25 percent below 1990 levels over the next decade. Since more than one third of emissions in the state can be attributed to the transportation sector, the state plans to start a pilot usage-based program.
- Existing Programs: The California Insurance Department adopted a usage-based (mileage only)regulation in 2009. The filings of two auto insurers, State Farm and the Auto Club of Southern California, to offer usage-based programs were approved in 2010. Since then several other companies have filed programs with the department. State Farm estimates that ultra-low-mileage drivers, those who drive less than 2,000 miles a year, could save as much as 45 percent of the cost of a traditional six-month policy.
- The California regulation allows an insurer to offer a program that bases the miles-driven rating factor for auto insurance on miles driven and verified rather than on estimated mileage. Under the California program, the policyholder agrees in advance to have the miles driven verified at the end of the policy period, and the premium adjusted retroactively if justified under the terms of the policy. Insurers may also offer policyholders the option to purchase auto insurance coverage for a specified price per mile.
- The California program is optional for both insurers, which may elect not to offer a such a policy, and for policyholders, who may continue to purchase a traditional auto insurance policy. Under California’s auto insurance law, the number of miles driven annually is the second most important factor in setting auto insurance rates—the policyholder’s driving record is the first. A 2006 California Insurance Department study found that 56 percent of policyholders underreported mileage. Insurers generally favor the usage-based concept. To encourage participation in the program by people who are concerned about privacy, the California regulations specifically prohibit insurers from requiring the use of a device that collects information on the vehicle’s location.
- In Texas, where a mileage-based law was passed in 2001, several insurers are offering mileage based policies. State Farm, a major auto insurer, now offers a policy to drivers who are current OnStar subscribers, which will allow the company to receive automatic odometer readings. OnStar provides motorists with communications, security and remote diagnostics, among other things. Under the Texas program, a policyholder who drives 6,000 miles a year would save an estimated 15 percent on auto insurance premiums.
Motor vehicles account for more than 25 percent of all U.S. greenhouse gas emissions. Usage-based programs that factor an individual driver’s actual mileage into the price of auto insurance, could reduce that amount significantly if broadly implemented according to Ceres, a network of companies concerned about global warming. A study by the Brookings Institution suggests that if drivers paid by the mile, driving would drop by about 8 percent.
There are two ways to reduce the greenhouse gas emissions associated with driving. One is to encourage people to purchase vehicles that emit less carbon dioxide into the environment and get more miles per gallon of gasoline. The other way is to reward people for driving fewer miles. Mileage information can come from the car’s odometer, which is checked at the end of the policy period, or it can come from a special device linked to the odometer or from a wireless sensor that can monitor speed as well as mileage.
Progressive Insurance, an early pioneer in the field, developed a usage-based product in the mid-1990s and registered it as “Pay-As-You-Drive,” a name that has come to denote the concept itself. The company’s current usage-based program now has another name. Other large auto insurers are creating their own programs, based on their own research into the factors predictive of claims, such as frequent hard-braking, which suggests that the driver follows too closely or is not paying enough attention to other drivers’ actions.
Meanwhile, ISO, an insurance industry data and predictive analytics company that provides products and services to help measure and manage risk, has embarked on a study, the results of which may ultimately be used to generate new usage-based rating programs for insurance industry use. A driver’s auto insurance premium is calculated based on many rating factors, among them the driver’s own safety record, estimated mileage and where the car is garaged, a proxy for the area or territory through which the car will mainly be driven. Each state is divided into territories, based on claims data. In addition, the type and age of the car, the driver’s auto insurance policy provisions and liability limits, and his or her age all help determine what a driver pays for coverage. Currently, people with a usage-based policy receive a discount at the end of the policy period if they drive fewer miles than anticipated or if they exhibit safety-conscious driving behavior or both.
ISO will aggregate data collected from its own fleet and that of development partners who participate in the study. Each variable collected will be evaluated to determine whether it is predictive of loss. Is a tendency to speed in itself dangerous or does it have to be accompanied by other risky types of behavior? Are people who buy policies with high deductibles more careful drivers? Some variables collected are expected to result in no predictive value, other variables may have predictive value after a short period of time and yet others may take years to properly evaluate.
When usage-based programs were first introduced, there were concerns about privacy. The devices now in use generally do not monitor where the car is being driven and, with information about an ever growing portion of the population now publicly available on the Internet or through social media, some observers say concerns about privacy are likely to ebb.
In a recent nationally representative public opinion poll conducted for ISO, one third of respondents said they would purchase a usage-based policy if there was a discount, another third said they would do so if the program reflected their actual driving performance and the remaining respondents were undecided. Cities are interested in this new trend in insurance rating because of the possibility of reduced congestion and pollution. Insurers are interested in it because it allows them to offer individualized rates.
KEY SOURCES OF ADDITIONAL INFORMATION
Usage-Based Auto Insurance. Towers Watson, 2011. Presented at Casualty Actual Society, March, 2011 Conference.
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