Pay as you drive insurance: will it really result in less driving?

In recent months, environmentalists and economists have worked themselves into a frenzy over pay-as-you-drive auto insurance, also known as PAYD. If you believe the advance notices, this is the greatest thing to come down the pike since the double-double.

As the name implies, PAYD insurance more closely links the cost of a motorist's annual insurance policy to how much they drive. The concept has been touted by the authors of "Freakonomics" and has also received major ink in a number of publications, including The Times.

Now, PAYD is coming to California. California Insurance Commissioner Steve Poizner released draft regulations Wednesday and has been a big proponent of PAYD. My colleague Marc Lifsher has the story in today's editions of The Times. When exactly PAYD will be available and which carriers will offer it is not yet known.

Proponents of PAYD claim it will result in people driving less to save money. And that's the part that always stops me. How do we know that knocking $200 to $300 off the cost of annual premiums yield that kind of behavior change? In my view, getting Californians to stop driving is kind of like getting them to stop breathing. Besides, we're not exactly living in a mass transit utopia.

So, I phoned Pascal Noel who with Jason Bordoff co-authored a study on PAYD in July for the Brookings Institution. They also did a follow-up report on how PAYD could impact Californians. Among their findings: 64% of California households would have lower premiums under PAYD, with an average savings of $276 annually per vehicle. Low income residents, in particular, would benefit and a majority of the citizenry would be driving less, they concluded.

How do you know?, I asked. Even the Brookings study says there is a paucity of data out there that shows that the few PAYD programs in existence have massively reduced driving.

"There is a ton of data that shows that when marginal driving costs rise, driving declines," Noel told me. "The most obvious source is gasoline prices." And, furthermore, he said there is widespread agreement in the economist community that such pricing triggers alter behavior.

Noel said there are other reasons to believe that PAYD will catch on. Among those:

1. Once some carriers decide to offer PAYD and drivers see savings, other carriers will also want to offer it. Noel said that his numbers show that 20% of Californians do 46% of the driving, meaning that there's a majority of people who drive less -- and could benefit by PAYD.

2. If people drive less, there should be fewer accident claims -- the reason that carriers will be able to afford PAYD.

3. "This is going to be permanent and people will have a longterm incentive to alter their behavior," Noel said.

Noel said that predicting the results of widespread PAYD programs can be tricky. "It's not certain that it will be so clear to consumers how much they are paying [for auto insurance] on a daily, weekly and monthly basis," he said.

"With cars you have to fill up every week or so and you can see the price is going up. With auto insurance, even if it's charged by the mile, it's not clear that customers are going to understand and react immediately unless they are being charged" on a frequent basis," Noel added. "For example, if people got a statement from the insurance company and the bill showed how many miles you drove recently, there's no reason to think they wouldn't react the same way as when faced with prices for gasoline."

What do you think Bottleneckers? Is PAYD going to change Californians' driving habits?

Related: Check out how an Australian insurance firm offers PAYD.

--Steve Hymon

photo: Richard Hartog / LAT
 

Comments

[Derek]

I may have missed something but how exactly are the insurance companies going to determine how many miles you drive in a certain period? Will this rely on the driver filling out more paperwork? Will this be a device in the car that could potentially be misused by auto insurance companies? I'm concerned how they'll prevent mileage fraud while not making it difficult for drivers to deal with.

I'm also concerned that such a plan punishes those who must drive a lot due to irregular jobs such as careers in the entertainment industry. I'd much rather focus on making mass transit more appealing and expansive rather than punishing those who currently don't have alternatives.

[Gary Kavanagh]

I don't think it would have effected my driving much since I was already converting nearly all my miles to cycling with a flat insurance rate. However I really wish this option was available sooner, since I have been spending full insurance for a car I would drive 2-3 times a month tops. I'm now selling the car all together so it's too late for me to benefit from it.

I do think that for some people it will definitely effect their driving. When people have an incentive they take notice. Take for example IKEA which started charging a nickle for disposable plastic bags and showing the charge on the receipt. Within a year they reduced disposable plastic bag use at their store by over 90%, with people bringing their own bag or buying reusable IKEA bags. Even if it's just saving a nickle every time, people do notice these things.

[Damon]

As a general proposal it sounds very promising to me. Even with gas a $4.50 a gallon I was spending about $150 a month because I have a fairly efficient car. My insurance policy is only a bit less than that every month, which means that the economic savings from me taking public transit instead of driving would nearly double (it works out to about 12.5 cents a mile)

Now, think about taking Amtrak. Right now a ticket from LA to SD is $34. Gas, at around 16 cents/mile for a 25 MPG car, only adds up to $20 for the same trip. Now factor in that if you didn't drive, you wouldn't have to pay $15 in insurance for that 120 miles., and you find....

Suddenly it's cheaper to take Amtrak!

[BOB2]

Steve,

The idea of pay as you drive was originally proposed by the Union of Concerned Scientists and EDF in the early 1990's. The Auto Club was interested very early on. It's a shame that such an obviously good idea took nearly twenty years to come about?

It turned out that in some cases suburban drivers, with drunk driving convictions, were actually paying less for auto insurance than urban drivers with good driving records. This was obviously based on the sound insurance principle that high mileage suburban drunks are safer?

Insurance was previously priced as an all or nothing proposition. The more you drove the less you paid per mile. High mileage drivers were consistently subsidized by premiums paid by low milieage (generally urban)drivers, in spite of increased exposure to accidents.

Since the average cost per mile for insurance is actually higher than the per mile cost of gasoline, some drivers will be more likely to drive less, since there is now an economic incentive to do so. So like with fuel prices we would expect to see less driving at the margins, and at least less growth in the rate of driving, than would otherwise be the case.

I believe "pay as you drive" insurance will be very popular, it will save my wife and myself money immediately, and will make insurance more affordable to urban drivers. It will eventuallly force insurers to reduce insurance "subsidies" to high mileage and dangerous drivers.

BOB2

[Zaya]

I get a State Farm discount for driving less than 7,500 miles a year, so it's already out there. I have a short commute (which was intentional), and I plan my errands to make more efficient use of the miles and gas. Luckily -- or not -- a lot of time spent in LA traffic is just that, time, and is not necessarily reflected in a lot of actual miles.