Pay-As-You-Drive Personal Auto Insurance – Recent Developments

The 1988 passage of Proposition 103 changed the California private auto forever. The regulations stipulated that insurance companies had to accept all drivers as defined by them and rate auto based on three primary factors: Driving Safety and Annual Mileage.

40 additional factors were later accepted on to a list of secondary permissible factors. Insurance score, however, is not one. Territories were extinguished in order to preserve statistically-built bands related to accident frequency, and other factors. In the end, the differences between bands would be reduced.

The original regulation and subsequent modifications had the following effect: Increased or increased subsidies for various policyholders.

  • Accidental drivers get a subsidy for good drivers
  • Short annual mileage drivers are subsidised by long-term mileage drivers
  • Urban drivers subsidize rural drivers
  • Nearly everyone subsidises low-experienced male drivers

These subsidies can cause inequalities in the market and influence behavior in ways that are not desirable. Drivers who have been in an accident may be paid too much. This could encourage drivers to report fewer accidents. A lot of data is not good. Absence of accidents in the database will eventually increase rates for the next lowest level of accident-proneness. According to statistics, drivers at higher risk seem to be in the lower accident category.

Other effects include increased competition in the over-priced segments of the market, increased number of drivers and rates for truly high risks.

Pay-as-you-drive insurance:

Regulators and others who are looking for a more detailed rating system pay attention to the small number of categories that can be used for annual mileage driven. Policyholders can easily understand the number of miles driven and it seems reasonable to measure exposure. Presumably this is in conjunction with “where are you driving” (territory). This is not “where do you drive”, but “where do you LIVE” and it seems to be a good way to protect a driver’s exposure (see next section).

The proposed regulation is being promoted as a “green provision”, encouraging drivers to drive less. Drivers will be able to have their insurance coverage applied by the mile they drive. This optional rating mechanism was proposed by Steve Poizner, California Insurance Commissioner. It allows insurers to offer consumers who want pay-as you drive coverage as an option.

Consumer groups object, stating that there are not enough protections in law to protect insured’s privacy. OnStar satellite and GPS-based meters, which are very similar to cell phones, are some of the tracking mechanisms.

Quoting the article

According to the Environmental Defense Fund, California could reduce its emissions by 55 million tons between 2009 and 2020 if 30 percent of Californians take part in voluntary coverage. That’s equivalent to taking 10,000,000 cars off the road. Californians could save up to 5.5 billion gallons and $40 billion in car-related costs. The California Air Resources Board recommended pay-as-you drive to help meet future climate change gas emission targets.

These numbers are hard to ignore.

b>But the research shows:

Research shows that auto insurance policies for pay-as you drive may not cover all of the potential exposure to claims. Age/gender combinations, insurance score, and geography are all important predictors for liability coverage. Property damage coverage is based on the car’s model. The others are then influenced by it. This information comes directly from a research paper The Relationship Between Credit-Based Insurance Scores & Private Passenger Automobile insurance Loss Propensity Michael Miller, FCAS and Richard Smith FCAS, Epic Actuaries June 2003.

Pros and Cons of Pay-As You-Drive:

  • Driving records make it easy for drivers to understand that insurance exposure is tied to mileage driven
  • The driver will direct determine the amount you pay for insurance. This is in addition to factors like age, sex and martial status. The driver does not have any control over it.
  • The current proposal is to offer an optional credit which will give low-mileage drivers a choice.
  • Emissions reduction


  • To avoid cross-subsidies and to comply with Actuarial Standards and Principles, the amount that a driver pays for his/her loss exposure should be as close as possible.
  • It is not easy to track mileage and some methods are feared by consumers and consumer watchdog organizations as a way to protect their privacy.

I believe there are simpler and better ways to improve the rating plan options for annual mileage. However, this would still be in keeping with lower emissions and “greener” policies. An obvious option is to increase the mileage bands and offer discounts (and debits), based on the automobile being covered. Discounts on Prius’s, and debits to Hummers.