Pay-As-You-Drive Insurance Comes to Brookings

By Dean Baker

Source: t r u t h o u t

Dean Baker's ZSpace Page

Many of the ways to reduce greenhouse gas emissions will require major changes in behavior and/or impose serious costs. However, there is one mechanism that could lead to substantial reductions in emission with no cost: pay-as-you-drive auto insurance.

The basic point is simple. With current policies, most people will pay the same amount for their insurance whether they drive 500 miles or 50,000 miles. However, their risk of being in an accident is clearly greater the more miles they drive. If we can have insurance prices reflect the increased risk, it would mean both better insurance pricing and giving people a substantial disincentive to drive.

The impact would be large. The average cost of insurance per mile driven is close to 8 cents. This means that if insurance were paid on a per mile basis, for a car that gets 20 miles to a gallon, pay-as-you-drive insurance would provide the same disincentive to drive as a $1.60 a gallon gas tax. This can easily lead to reductions in gas consumption and greenhouse gas emissions from the auto sector of 10 percent or more.

The great part is that it doesn't even raise driving costs on average, it just makes a fixed cost - the annual insurance premium - into a per mile cost. Since people will now presumably drive less and therefore have fewer accidents, they should actually end up paying less on average for insurance.

I first wrote about this a decade ago with my then colleague at the Economic Policy Institute, Jim Barrett. Others had written about pay as you drive even earlier, such as Patrick Butler with the National Organization for Women, Daniel Khazzoom at San Jose State University, Todd Littman at the Victoria Transport Institute and Aaron Edlin, now at Berkeley. The reason for mentioning pay-as-you-drive insurance now is being discussed in the mainstream of the economics profession. Two researchers affiliated with the Brookings Institution recently wrote a piece touting the merits of pay-as-you-drive insurance.

This is great news. It means Congressional staffers and potential White House political operatives can now take the idea seriously. Environmental groups, who are more fearful of new ideas than global warming, may also be persuaded to consider it as a policy option. Now that a pillar of intellectual establishment like Brookings has certified the respectability of pay-as-you-drive insurance, it means it is at last a viable political option.

It's great to see the Brookings crew can occasionally pick up a new idea. Of course, pay as you drive is very safe, as new ideas go, since it doesn't threaten any powerful interest groups. Insurance companies can make just as much money selling pay-as-you-drive insurance as selling their current polices. The oil companies may be unhappy, but they can no more prevent pay-as-you-drive insurance than they can stop people from driving more fuel-efficient cars.

It would be interesting to see if the Brookings gang could ever be persuaded to examine some policy proposals that actually did ruffle some powerful feathers. For example, this group of hard-core "free traders" has never been interested in freer trade in the area in which the United States stands to benefit the most, health care. If our trade policies made it easier for foreign doctors to come to the United States , or US citizens to take advantage of high-quality, low-cost care abroad, the potential gains would be enormous. Of course, free trade in medical care would hurt the insurance industry and highly paid medical specialists; that's a lot more difficult than going after textile and autoworkers and the other losers from recent trade agreements.

Speaking of protectionism, how about considering more efficient alternatives to patent-financing of prescription drug research? Without government-imposed patent protection, we would pay less than $50 billion a year for drugs that now cost us $250 billion a year. If direct funding for research sounds too radical, how about just paying for the clinical trials where the worst industry abuses occur? But this proposal would anger the pharmaceutical industry.

In a year in which the big Wall Street banks have been driven to the edge of bankruptcy or beyond, by executives who have pocketed tens of millions of dollars in compensation, one would think economists might be concerned about the obvious agency problem in the system. Perhaps, they would try to rein in a sector of the economy that is clearly out of control, imposing a small financial transactions tax that could raise more than a trillion dollars over the next decade. This one would upset the financial industry, which happens to be a big source of money for the Brookings crew.

No one expects a pillar of the intellectual establishment like Brookings to be a major source of cutting-edge ideas. It is encouraging that they can occasionally pick up an idea that has been developed on the fringe, like pay-as-you-drive insurance. It's too bad the power of major industry lobbies makes this such a rare occurrence.

Sydney-siders increasingly vulnerable to oil price and mortgage cost pressure

MORE than 40 per cent of Sydney's suburbs have become increasingly vulnerable to high oil prices and mortgage stress in the past five years, according to a study to be released today by Griffith University.

While those on the far-western fringe of Sydney are the most car dependent and burdened by household debt, a new wave of vulnerability at the bowser has washed through middle-ring suburbs such as Liverpool, Hurstville and Blacktown.

While vulnerability to oil prices declined in some pockets of the city, for example in the northern suburbs between North Rocks and Pymble, big areas became more acutely exposed to high prices. Parramatta and Blacktown increased on the scale, as did other areas such as Penrith, Hornsby, Mona Vale, Sylvania and La Perouse.

The study, Unsettling Suburbia: The New Landscape Of Oil And Mortgage Vulnerability In Australian Cities, assesses the way car use, income and mortgage repayments combine in the suburbs of each capital city.

Based on the 2006 census data, the research by Jago Dodson and Neil Snipe found an increasing number of Sydney suburbs were becoming "oil vulnerable".

"In Sydney high oil and mortgage vulnerability is distributed across much of the city's western suburbs, including Hebersham, Green Valley, Cabramatta and Canterbury in the mid and outer west," the report said.

"The number of areas in which oil and mortgage vulnerability increased over the 2001 to 2006 period far outweighed those in which oil and mortgage vulnerability declined," the paper says.

While people in far outer suburbs remain highly exposed to debt and car-related costs, they have been "joined by increasingly vulnerable neighbouring middle suburban areas".

About 18 per cent of Sydney's suburbs have become less vulnerable, the study finds. But this is eclipsed by those areas worse off, as "41 per cent saw their oil and mortgage vulnerability worsen between 2001-2006".

The study relied on an index created by the researchers dubbed VAMPIRE - vulnerability assessment for mortgage, petrol and inflation risks and expenditure. It combines census data on the proportion of people in each district that commute to work in a car, households with two or more cars, the median weekly household income, and the number of households being bought through a mortgage.

Big swathes of Sydney are already changing their travel patterns in response to rising petrol prices, by switching to public transport in record numbers and cutting back on non-essential car trips.

The study says the wider effects of recent oil rises are yet to be felt. "The full impacts of the dramatically higher 2008 fuel prices will probably not be seen until the early years of the next decade. In this context the problem of household socio-economic vulnerability and exposure to the impacts of higher fuel prices and mortgage interest rates remains highly relevant."

The authors say state planning policies have often contributed to the increasing social isolation of many suburbs where people rely increasingly on cars.

"The problems of suburban infrastructure deficits, especially in public transport, reflect the consistent failure of state governments to expand infrastructure to keep pace with the rate and scale of land development," the paper says. "These problems have been exacerbated by the planning of suburban areas around automobile travel."

As a result of housing, employment and transport planning in Sydney, the poorer communities carry the greatest burden of oil stress. "Households in middle and outer suburbs face higher levels of car dependence and fewer alternative travel options than those in the inner areas … This means that the costs of higher fuel prices will be borne most heavily by those with the least capacity to pay."

Source: Sydney Morning Herald, 11 August, by Linton Besser, Transport Reporter

Australia's Lifestyle Revolution

Excerpt:
"That lead me to my next encounter and potentially the most dramatic weekend story. A senior insurance executive told me that he was puzzled by the latest trends in car insurance. It was too early too tell (“come back in three months”, he said) but there were signs that a lot of people were locking up their second car and using it only when they had to. Accordingly, they were not comprehensively insuring it."

Article
I had one of those weekends where I kept running into people with fascinating perspectives on the looming acceleration of the economic downturn. My conclusion is that the early indicators we have seen are the forerunner of a much steeper downturn which will unfold over the next six months.

There is no doubt interest rates will fall. However, there are also signs that a legacy of this downturn may be dramatic lifestyle changes.

My first encounter was with a national display home builder and marketer who told me that his current sales were down only marginally but that attendances at his display villages were down 40 per cent in Queensland and Victoria.

He had checked with his rivals and found they were having a similar experience. In NSW it has been a disaster for a long time. Those lower numbers will almost certainly translate into a large fall in new home orders and, later, in building. What surprised the builder is what is happening in Queensland. He had believed for a while that Victoria was too strong, but had expected Queensland to hold.

The obvious cause was that the combination of higher interest rates, a credit squeeze, a very tough time for contractors, plus higher food and fuel prices that were slashing demand for new homes. But a rather unexpected reason bobbed up – people were not driving their cars at the weekend unless they really had to.

That lead me to my next encounter and potentially the most dramatic weekend story. A senior insurance executive told me that he was puzzled by the latest trends in car insurance. It was too early too tell (“come back in three months”, he said) but there were signs that a lot of people were locking up their second car and using it only when they had to. Accordingly, they were not comprehensively insuring it.

If that turns into a lifestyle change then we are in for a enormous blow to all sectors of the motor industry – makers, retailers, toll roads and repairers. It will transform public transport. By coincidence, in Victoria over the weekend the local transport minister was explaining how the weekend use of buses had skyrocketed. These building, insurance and bus anecdotes may be early indicators of an unprecedented lifestyle change.

Later, I ran into some Harvey Norman people who said they were enjoying the pre-Olympic boom in TV sets, but all the signs were there for a steep fall in activity.

A major social organisation which is supported by a large number of contractors reports that its annual dinner dance, which is normally rushed, sold less than 30 tickets – break even is about 160. The event was cancelled.

In Victoria the slump is being accentuated by the looming dramatic rise in private school fees in 2009 after Premier John Brumby handed out double-digit pay rises for key teacher classifications, but gave no extra money to private schools. Kevin Rudd has not come to the party.

What people on the edge are doing is budgeting and cutting down all unnecessary expenditure and this will show up in some very dramatic declines in the next six months.

Source: Business Spectator, written by Robert Gottliebsen

Real Insurance's new product

Real Insurance now offers Pay-As-You-Drive car insurance in Australia. Under their product consumers are trusted to report their odometer reading at the beginning of the policy term and purchase a certain number of kilometers. Odometer readings are verified if there is a claim, giving motorists an incentive to be accurate (false odometer readings void coverage).

Link to their website:
www.payasyoudrive.com.au

Pay-As-You-Drive Car Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity

July 2008 —

ABSTRACT

The current lump-sum pricing of auto insurance is inefficient and inequitable. Drivers who are similar in other respects—age, gender, location, driving safety record—pay nearly the same premiums if they drive five thousand or fifty thousand miles a year. Just as an all-you-can-eat restaurant encourages more eating, all-can-drive insurance pricing encourages more driving. That means more accidents, congestion, carbon emissions, local pollution, and dependence on oil. This pricing system is inequitable because low- mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average.

In this discussion paper, we propose and evaluate a simple alternative: pay-as-you-drive (PAYD) auto insurance. If all motorists paid for accident insurance per mile rather than in a lump sum, they would have an extra incentive to drive less. We estimate driving would decline by 8 percent nationwide, netting society the equivalent of about $50 billion to $60 billion a year by reducing driving-related harms. This driving reduction would reduce carbon dioxide emissions by 2 percent and oil consumption by about 4 percent. To put it in perspective, it would take a $1-per-gallon increase in the gasoline tax to achieve the same reduction in driving. Unlike an increase in the gas tax, PAYD would save most drivers money regardless of where they live. We estimate almost two-thirds of households would pay less for auto insurance, with each of those households saving an average of $270 per car.

Despite the large social benefits from PAYD, there are currently several barriers to its widespread adoption, including the cost to monitor miles traveled and some state insurance regulations. In order to facilitate the spread of PAYD, we propose a three-part strategy. First, states should pass legislation permitting mileage-based insurance premiums. Second, the federal government should increase the funding available to PAYD pilot programs by $15 million over five years. Finally, since the monitoring costs may exceed the expected benefit of PAYD to insurance firms but are much smaller than the social benefit, the federal government should offer a $100 tax credit for each new mileage-based policy that an insurance company writes, to be phased out once 5 million vehicles nationwide are covered by PAYD policies. In short, PAYD represents a win-win policy. What is good for drivers, in this case, is also good for society.

Source: Brookings Institute

View full paper »

State Considers Pay-As-You-Drive Auto Insurance

Here is an article in Yesterday's LA Times. There are also 50 public comments, representing the general range of concerns and misunderstandings. - Todd Litman

A plan that charges motorists based on miles driven could cut fuel use, pollution and traffic as well as lower premiums, say backers. Opponents worry about privacy issues.
By Marc Lifsher, Los Angeles Times
http://www.latimes.com/classified/automotive/highway1/la-fi-carinsure15-2008jul15,0,2725003.story

SACRAMENTO -- An alliance of insurance companies and environmentalists wants to bring a new kind of mileage-based auto insurance to California and charge motorists only for the number of miles actually driven.

Called pay as you drive, the option is available from a few insurers in 34 states -- but not California -- as well as Canada, Japan and Europe.

One company, GMAC Insurance Group, says its customers -- whose mileage is tracked by General Motors Corp.'s OnStar system -- have reduced the premiums they pay by 13% to 54%. And California drivers could expect to get similar savings if pay as you drive is approved here.

The system could cut motoring costs, protect the environment and reduce traffic congestion, boosters say. Opponents, mainly privacy advocates, say they fear that insurance companies could begin tracking more than just a driver's mileage. High-mileage drivers could also see higher rates.

People who agree to tie their insurance premiums directly to miles driven are likely to make the maximum effort to stay out of their cars. That way, proponents say, they'll save money on gasoline and insurance, the top two costs of owning a car.

"I'm getting good savings," said Mark Holcomb, a retired federal worker, who recently moved from San Diego to a suburb of Orlando, Fla. "I'm not driving so much, so my likelihood of an accident is lower."

Holcomb said he cut his insurance bill by $634 a year for his Cadillac Escalade and his Saab convertible by switching to a GMAC pay-as-you-drive policy.

The concept, if applied nationwide, would do a lot more than cut insurance bills, says a study by the Brookings Institution, a Washington think tank. Pay as you drive could create $52 billion in annual benefits from fewer accidents, reduced traffic and pollution, and less reliance on foreign oil, the study concludes.

"This is a tool to reward drivers who actually drive less," said Assemblyman Jared Huffman (D-San Rafael), the author of a bill in the Legislature, AB 2800, to authorize pay as you drive in California.

Huffman's measure is sailing through the Legislature with little opposition. State Insurance Commissioner Steve Poizner is working on regulations that would put a similar proposal on the books.

Pay-as-you-drive skeptics say they're all for reducing auto use but are wary about how insurers might keep tabs on their customers. Others worry that the deep discounts offered urban drivers, who don't use their cars much, could be offset by making rural motorists pay more.

"The grocery store could be nine miles away," said Assemblyman Joel Anderson (R-San Diego), who voted against the Huffman bill. "I don't want to punish people" who live in the country.

GMAC and a second insurer, Progressive Corp., report widespread customer acceptance of their pay-as-you-drive policies in other states. Progressive says that about one-third of its new customers are volunteering for pay-as-you-drive pilot programs underway in Minnesota, Michigan and Oregon. GMAC says it has signed up 30,000 policyholders nationwide for a low-mileage discount program.

Proponents, including trade groups representing most major insurance companies, say that now is the perfect time for pay as you drive. With gasoline prices near $5 a gallon and likely to head higher, motorists are changing their driving patterns.

Last month the U.S. Department of Transportation reported that Americans drove 1.4 billion fewer miles in April than they did a year earlier.

But privacy advocates worry that companies might install sophisticated GPS devices on cars that would communicate via satellite where and when motorists travel and whether they are speeding or driving recklessly.

"It's going to give insurance carriers your exact location at all times and could wind up being subpoenaed in divorce proceedings and other lawsuits," said Paul Stephens of the Privacy Rights Clearinghouse in San Diego.

Insurance experts suggest that privacy concerns may have been the undoing of a pay-as-you-drive product launched two years ago by Britain's largest auto insurance company, Norwich Union. In June the company canceled its program after only 10,000 customers signed up.

Huffman said he didn't want to make the same mistake. He said his bill would allow the tracking of mileage but didn't endorse GPS surveillance. His bill would leave details about how to record mileage to the California Department of Insurance.

Poizner said he intended to explore techniques that are less invasive than GPS. Those include using electronic monitors that check only odometer readings, accessing maintenance records and authorizing smog inspection stations to report mileage readings.

Under California law, the number of miles driven in a year is the second-most-important factor that insurers must use to compute a customer's premium. But companies complain that policyholders' estimates of how much they drive often are way off the mark. According to a 2006 Department of Insurance study, 56% of policyholders underreported annual driving.

"Allowing drivers to submit 'estimates' of inaccurate mileage breaks the connection between conduct and consequences," said a letter to the Assembly Insurance Committee from the Personal Insurance Federation of California, a trade group.

Said Yves Didier, who commutes from the San Fernando Valley to work as a police officer at Los Angeles International Airport, "Giving motorists a chance to save money by driving less is a good idea, as long as it's strictly voluntary.

"I personally would not want a device in my vehicle. I feel like it's another step toward Big Brother watching me," he added. "But if it's voluntary, I don't see any harm. It would create a benefit for the environment and obviously to certain customers."

marc.lifsher@latimes.com

Pay-As-You-Drive Insurance: Recommendations for Implementation

Abstract

This paper provides guidance for implementing Pay-As-You-Drive (PAYD) vehicle insurance, which directly incorporates mileage as a rate factor. It describes PAYD pricing options, discusses PAYD benefits and costs, describes regulatory reforms, evaluates various objections to PAYD, and provides specific recommendations for PAYD implementation. Various data sources indicate that crash costs increase with annual vehicle mileage. As a result, PAYD increases actuarial accuracy (premiums better reflect a vehicle's claim costs). PAYD pricing rewards motorists when they reduce their mileage, providing financial savings and additional benefits including increased safety, congestion reduction, road and parking facility cost savings, energy conservation, emission reductions, and increased insurance affordability.

Although there are several possible ways to implement PAYD insurance, some provide more benefits than others. Insurance regulators can maximize benefits by defining performance standards that policies must meet to be considered PAYD, as described in this paper. Critics raise various objections to PAYD pricing, but many of these are technically inaccurate or can be addressed with appropriate implementation practices.

Source: Todd Litman

Victoria Transport Policy Institute

16 June 2008