Until I sold my car last year, I was on the lookout for a better insurance deal 
- I drove my car only 5,000 miles a year, but I paid the same as someone who drove theirs 50,000. Not fair! And expensive.
Ultimately, expensive enough per mile that I dumped the car (I might not have if not for the insurance cost). For many people who get around primarily by foot, bike or transit, they want to have a car but don’t want to pay for driving they don’t do – and don’t want to subsidize the driving done by other insurance customers.
Enter “Pay-As-You-Drive” insurance, or PAYD. It’s a concept that has been around for years – and in 2006 legislation encouraging it was passed in Oregon – but has never been offered by an American insurance company (a UK company, Norwich Union, offers it). In the next few months, Progressive Insurance plans to roll out a PAYD service in six states (not sure yet whether Oregon will be one of them).
PAYD could fix the current situation in which low-mileage drivers subsidize the insurance of high-mileage drivers. It makes you think about the other costs of driving that are also paid by everyone, regardless of how much they drive: the crashes, the congestion, the carbon emissions (which together cost everyone an estimated $300 billion each year) plus all the road building and maintenance. (For this background, see today’s New York Times Magazine article on PAYD or the Sightline Institute summary.) What if all of those costs were rolled into a per-mile fee? How would that change the calculation of where we live, where we work, what kind of communities we build, and how we get around?
If there’s a large untapped market of low-mileage drivers like me, PAYD insurance could be a huge success for Progressive, wooing us away from our expensive all-you-can-drive insurance policies. And it could be a proof of concept, showing the way for bigger changes to come.
What should happen is that we solve the problems you talked about above PLUS we eliminate the uninsured motorist by putting all liability coverage on at the gas pump.
That is, we increase the price of gas by an amount per gallon that funds the liability pool. That way, there are no uninsured drivers — everyone who buys gas has helped pay for the liability coverage. It eliminates the most costly, wasteful part of insurance coverage (marketing and underwriting) and eliminates the double-victimhood of paying your insurance bill only to be hit by someone without insurance.
The way you keep it from being a clusterflog on the claims service end is that you let the insurance companies do that part (for a fee). That is, you divide up the population into equal risk blocks of 10,000 drivers, and you let insurance companies bid to service any claims by those drivers. The amount of the bid is the amount the state pays (out of the pool funded by the per-gallon tax) based on the expected loss in that block of drivers, plus the insurance company’s fee for providing all the policy service.
Thus, companies compete to earn money serving blocks of drivers. Everyone with a claim rates the policy service they received from the company, which figures into their bid — companies evaluated poorly by residents have an adder put on top of their bid (so that other companies win more bids to serve more drivers); companies with good evaluations have an amount subtracted from their bid so that they win more blocks (but are paid at the amount they actually bid).
This is the model that Democratic National Treasurer and finance guru Andrew Tobias proposed and it’s still the best idea yet for making auto insurance (a) universal; (b) affordable; (c) environmentally smart.
His book “Auto Insurance Alert” explains it quite well, in his engaging style, but that’s the gist of it. If BTA really wants to do a good deed, this would be a prime candidate.
Fully 12% of the drivers in Oregon are estimated to be uninsured entirely, and that is bound to increase as gas costs continue to shoot up. Higher costs that include insurance help discourage driving, encouraging alternatives like bikes, and do so with an absolute minimum of administrative overhead.
And if illegal immigrants no longer have access to driver’s licenses, they no longer have access to insurance. I’ve heard some suggest that this change will also increase the number of uninsured (and uneducated by the DMV) drivers on the roads.
Great NYT column… and yes, a major reform of our car insurance system with its “all you can eat” policies is long overdue. What is interesting is that most Americans are probably more willing to have a private company track and “tax” their car mileage than just have the government make us pay for the negative externalities associated with driving, through increased gas taxes (Pay-At-The-Pump) or congestion pricing.
Also, some form of PAYD is already offered here in Oregon by Progressive through their TripSense program. I get a 5% discount on my car insurance (and up to 25% at renewal), for just installing a small device under my dashboard and then uploading my odometer data once or twice a year.
I pay more than $700 a year for auto insurance, and drive my car less than 100 miles a year. Why do I keep the car? In case of emergency — I am the only licensed driver in our house: to take my dog to the vet (she’s not welcome on TriMet buses), and for occasional very heavy purchases from a Fred Meyer a mile from the house.
I would obviously benefit tremendously from a PAYD policy. Incidentally, my insurer, Allstate, does offer a slight discount if you drive fewer than 7,000 miles a year. And I get a further modest break because my auto insurance is packaged with homeowners’ coverage. But I still pay way too much.
John M., First, thanks for limiting your driving so much. You’re my hero. I have been trying to get my wife to go car free, but she has concerns about it. One of the ways I respond is that I say “We’re not talking about never using a car, we’re just talking about not OWNING a car,” and then I discuss Zip-car, cabs, borrowed cars, etc.
I’m curious, if you don’t mind my asking, whether you’ve considered cabs or Enterprise truck rentals for the occasional heavy things (cabs in emergencies)? If you’re paying a dollar mile just for insurance, you could afford a lot more than 100 miles of cab fares/truck rentals for the same $700 …
John; interesting pay at the pump concept, though there is a wide variety of gas consumption from vehicle to vehicle, and then of course those who drive horribly would be subsidized by those who drive safely. Perhaps a baseline fee at the pump would work, which would also encourage driving economical vehicles. If a driver had an accident, there could be another process to collect additional fees for their high risk driving such as a traditional insurance policy requirement…
John,
Fair question: Why do I keep the car when the tiny mileage and high insurance costs make it so uneconomical?
I have sort of a sentimental attachment to my car — a Camry wagon. I’ve had it for 19 years, so it’s almost like part of the family. I just don’t use it much. I do have to run the engine every couple of weeks or so, or else the battery goes dead — and then the car would not be much help in an emergency.
I also have three bikes, one of which I’ve owned for 36 years and the other two for more than 20. I no longer use them as much as I should either, due to changing circumstances. Nearly all my travel these days is by foot or Tri-Met.
Tim — we already subsidize the worst drivers — that’s what insurance does … take money from those who don’t have losses and give it to those that do. I presume that the pay-at-the-pump would only be for liability … that is, if you want to insure your OWN maserati or lexus, you have to buy that yourself. The fee at the pump is to insure everyone else FROM you (and vice versa). So I think that’s fair. And, as you note, you can move penalty fees from insurance payments into the auto fund directly at license plate renewal time — pay your fees or no license plate renewal.
Plus, eliminating the uninsured motorist issue is HUGE. Getting the 12-15% (and climbing) of motorists who are naked now into the system will be a boon for all.
And, yes, it’s an explicitly pro-environmental measure, designed to cost more for big heavy vehicles (the ones that cause more damage and injuries and fatalities). In other words, you pay more because you create more risk for others. The tiny little gas sippers pay less because they impose much less risk on everyone else.
Interesting to know.
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