By John Grant
The largest US car insurer, State Farm, has recently applied in California for regulatory permission to offer a pay-as-you-drive policy to motorists. They may not be the first in that huge market, but they signal such schemes are becoming mainstream.
Pay-as-you-drive was first introduced in Australia in 2008 and has been a huge success there. It has been rolled out in a small number of other countries since.
It has been especially popular for drivers who do less than the average amount of travel and they have been able to achieve significant savings on their annual insurance bills.
Research has shown the concept is a fairer way of offering car insurance compared to the ‘one price fits all’ approach offered by New Zealand insurers.
It means that a car that spends more time in the garage than on the road will pay proportionally less than a car in frequent use. It has also been suggested as a means of improving safety on the roads. A prestigious US researcher, The Brookings Institute, has published their findings, here.
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 subsidise insurance costs for high-mileage drivers, and low-income people drive fewer miles on average.
In this discussion paper, the authors 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.
This research promotes a view that if drivers had to pay insurance on a distance traveled basis then it encourages less use of the vehicle that makes roads safer and is good for the environment.
With the product in broad use in Australia and now being adopted by the largest car insurer in the US, it must be only a matter of time before one of New Zealand’s insurers launches the product.
With our high ownership levels of cars and the level of uninsured drivers, anything that promotes cheaper alternatives for car insurance and less use of cars must be a winner for whoever is first to market with this innovative concept.