New auto insurance trend gains traction across the country

Officials in California and around the country have high hopes for new "pay-as-you-drive" (PAYD) auto insurance programs they say will save motorists money - and could help save the planet - just by tailoring policies to fit the actual number of miles policyholders drive.

"As more insurers offer this type of program, California will benefit from a healthier environment and consumers will benefit from a wider selection of choices," says state Insurance Commissioner Dave Jones in a statement about the introduction of a fourth PAYD program to be made available to drivers in the state.

Proponents say the benefits of PAYD extend far beyond the Golden State.

PAYD is a "win-win"
Government officials and industry experts say PAYD programs mean more than just the possibility of discounts for consumers who are comparing car insurance quotes online or in person. An expanding body of research shows they could provide people with an incentive to drive less, thereby reducing pollution, decreasing roadway accidents and deaths and easing gridlock, potentially saving billions of dollars in economic costs nationwide each year.

"PAYD represents a win-win policy," according to a 2008 Brookings Institution report that called on state and federal legislators to encourage both consumers and coverage providers to participate in the programs.

California is one of several states - along with Texas and Oregon - where state regulators have encouraged insurers to offer policyholders the option.

At least 13 coverage providers, including major insurers Progressive, State Farm and Allstate have developed voluntary PAYD programs that can reward policyholders with discounts of around 20 percent, according to the Insurance Information Institute (III). Those companies represent a combined 60 percent of the private auto coverage industry.

Fourteen states have included the programs in their environmental plans, according to a report issued in December by the Massachusetts Office of Energy and Environmental Affairs.

"Pay-as-you-drive programs are increasingly popular with consumers because they provide an option that works well for many drivers and that can also benefit society," says Cesar Diaz, founder of http://www.onlineautoinsurance.com and a veteran agent.

Going from buffet-style to pay-as-you-go
The idea behind PAYD is simple: Instead of relying on rough estimates of the miles that will be driven during an annual policy period, the programs allow insurers to monitor policyholders' mileage through either an electronic device installed in a vehicle's universal port or by checking odometer readings.

Policyholders can qualify for discounted premiums if they drive less than predicted.

The traditional "lump-sum" method of insuring private vehicles actually encourages people to drive more, according to the Brookings Institution. That is because policyholders who are similar in most respects - including standard rating criteria such age, gender, location and driving history - pay pretty much the same for insurance whether they drive a few thousand miles or 50,000 miles a year.

That system causes unfairness because it forces those who drive little to subsidize coverage costs for others who log many miles and cause more accidents, the Brookings report states. PAYD programs are more equitable because they allow consumers to buy coverage per mile rather than in a lump sum.

If all motorists were covered by PAYD policies, the Brookings Institution report estimated, driving would decrease by 8 percent nationwide, saving the U.S. as much as $60 billion a year in economic costs, reducing carbon dioxide emissions by 2 percent and oil consumption by 4 percent.

And two-thirds of households would pay less for auto coverage, with savings for each estimated at an average of $270 a year, according to Brookings.

In its report, the institution noted several barriers to implementing PAYD insurance options nationwide, including regulations in some states and the cost for insurers to provide electronic mileage verification devices, which can outweigh the benefits seen by those companies.

The institution urged states to pass legislation permitting the programs and the federal government to increase funding to support PAYD, including giving coverage providers tax credits for each new PAYD policy written.