The Next Great Innovation in Auto Insurance: Pay As You Drive

by Erik Sahagian, VP, Better World Insurance

Source: http://www.betterworldclub.com/articles/LeadStory_PAYD_May2207.htm

Better World Club recently supported a Massachusetts proposal to jump-start Pay by the Mile Auto Insurance for the second time. Here is an excerpt from the statement of support:

Some have chosen to falsely frame the recent "Pay as you Drive" proposal as an assault on freedom. In fact, the opposite is true. PAYD is quite simply an attempt to more fairly price that necessary evil we know as auto insurance. By charging a per mile rate, insurance would join an infinite list of products from ice cream cones to xylophones which are paid for and consumed on a per unit basis. Would these critics of PAYD have us all pay the same, no matter how much potato salad or heating oil we consume? Is that how a market functions? PAYD simply fine tunes the long standing and sensible low mileage discount feature already part of many states' auto rating formulas, bringing it from a multi-tier pricing structure, to a per mile based system. Other factors, such as theft and accident rates, would still have a place in the equation.

Would this tweaking of the existing mileage discount have an effect on overall driving habits? Perhaps. Perhaps not. Certainly some drivers would pay more and others less, and some might alter their driving habits, but if the same amount of accidents were to take place, the net amount of premiums paid by drivers to the industry should be the same.

However, if one were to assume this change in pricing philosophy were to lead to less driving overall, what would be the ramifications? In addition to reductions in emissions, one could expect congestion to drop off as well. This is where PAYD really gets interesting. All drivers, good, bad, and ugly are less likely to experience accidents on less congested roads, and will likely spend less time idling in traffic. Thus this change in pricing potentially kicks off a chain reaction, in which fewer cars on the road results in fewer accidents, which in turn brings lower rates. Less time stuck in traffic means higher MPG and reduced travel time as well, making a win/win/win situation a legitimate possibility.

Pay As You Drive offers no guarantees these changes will materialize, but at the very least promotes freedom by allowing a greater hand for market forces in the setting of the rates consumers otherwise have very little control over. Maybe some would use this pricing change as the catalyst for an "environmentally friendly" vehicle, occasional telecommuting or ride sharing. Many others simply don't have much, if any, flexibility. Life is a series of trade-offs. But the overall effect would almost certainly diminish driving to some degree. There can be no dispute that less collective driving would naturally bring about lower individual rates. Industry resistance to this eminently logical idea serves only to feed the conspiratorial theories of those industry critics who charge that insurance companies cherish high rates because they make their money not by efficient underwriting, but by investing (your/their?) money and, therefore, simply look to maximize the "assets under management" (AKA premiums) in order to maximize profits (see "The Invisible Bankers" by Andrew Tobias).

The time to bring auto insurance pricing closer to the real world is long overdue, and by adopting the Pay As You Drive proposal, the legislature has a golden opportunity to expand the role of market forces. It is clear that those who drive less should pay less. Paying for what you use and not for what you don't is more than fair; it's the basis of the market system. That is the essence of the PAYD plan. Pay As You Drive is a common sense idea whose time has come.