Frequently Asked Questions

Q. What is Pay-As-You-Drive (PAYD) insurance?

A. PAYD policies still incorporate the traditional rate factors, such as driver history (years of experience, moving violations, previous crashes), geographic location, and vehicle type. The policies would just charge on a per-mile or per-minute basis.

Conventional auto insurance charges a fixed rate for a specified period of coverage. It matters not how little, how often, or how far the vehicle is driven. Unlike conventional auto insurance, PAYD pricing utilizes a variable cost with respect to vehicle travel, so premiums are directly related to mileage.

More than 80% of the costs of owning a vehicle are fixed, and traditional vehicle insurance has always been considered a fixed cost. Once a person has a vehicle and insurance, there is very little incentive not to use it. Conversion from a conventional auto insurance pricing scheme to PAYD would increase the variable costs to nearly 50%.(1)

PAYD policies are more actuarially accurate, better reflecting the true claim costs of each vehicle. PAYD provides drivers an opportunity to save money and an incentive to be efficient in their vehicle use (e.g., consolidating multiple errands into single trips, carpooling, using mass transit, walking, biking, etc.).

Accuracy improves significantly if mileage is incorporated in addition to currently-used risk/rate factors. The current system undercharges high-mileage motorists and overcharges low-mileage motorists.(2)

PAYD represents the principle that prices should reflect costs. Persons who drive less simply cost less to insure. Under the traditional system, low-mileage drivers subsidize high-mileage drivers.(2)

Traditional policies essentially amount to all-you-can-drive policies, encouraging gorging and over-consumption, much like an all-you-can-eat buffet; i.e., you have already paid a flat rate for the insurance, so you might as well use it. With PAYD insurance, there is an incentive to consolidate trips, since additional miles cost additional money. Reduced mileage results from the realization that certain trips “just are not worth it.”(2)

Q. Don’t insurance companies already provide discounts based on mileage?

A. Current policies do offer slight discounts for low-mileage drivers, but the low-mileage discount does not remotely reflect the difference in accident risk between high- and low-mileage drivers. A 50% reduction in mileage results in a premium discount of only 5-10%. And, the discount is applied to your next term – not the term in which you drove half as much as you expected. Motorists, therefore, do not perceive savings in premiums when they reduce mileage.(2)

Q. Who would benefit from PAYD?

A. We all would. Seniors, students, low-income consumers, women (who drive 40% less than men and have 40% less accidents), and car owners who drive infrequently would likely benefit directly by saving money on their car insurance. However, everyone would benefit from the expected increase in number of insured drivers and from the decrease in traffic and air pollution.

Q. How would the insurance company track mileage?(2)

A. There are three main options for tracking vehicle miles traveled: manual odometer audits, continuous tracking via Global Positioning Systems (GPS) or Global Locating Systems (GLS), or the use of radio frequency identification devices.

Manual odometer audits could be performed at motor vehicle inspection facilities or approved vehicle service facilities. Mileage information could be transmitted directly from the auditor to the insurance company, or the consumer could send a copy of the statement. Odometer audits would take 5-10 minutes and vehicles could be inspected to protect against fraud (calibration of odometer, tire size, etc.). Odometer audits would require no new technology, could be done during required inspections or routine services, and involve few privacy concerns. A simpler version would allow vehicle owners to report their own mileage, verified by random spot checks conducted by the insurance company.

GPS- or GLS-tracking utilizes technology contained within the vehicle (e.g., OnStar® GPS system). Data can either be collected by automated cell phone transmissions or on computer memory cards. Many vehicles already contain the technology (e.g., OnStar® GPS system); other consumers would pay to have a system added. Consumers would pay a nominal, on-going fee for the monitoring of the mileage. However, possession of the system would also allow the consumer to utilize other technology-based services, such as emergency assistance and real-time route planning. GPS-tracking allows the insurance company to track where, when, and how long a vehicle is driven. The company can then adjust rates based on road location and time of day. The equipment, if not already preloaded, can be placed under any of the seats or in the trunk.

GPS / GLS technology easily tracks mileage, reducing consumer effort, and might allow consumers to download detailed information from the Internet regarding their driving patterns, etc.

One major concern consumers have with a GPS system is privacy and confidentiality. It is also initially more expensive for the consumer, and there are costs associated with switching the technology to another vehicle.

A third tracking option utilizes a tag or computer chip attached to odometer sensor, which transmits current odometer readings and vehicle information. This technology would track the mileage only – not vehicle location – and could be designed to transmit information at any interval (e.g., once per week, once per month). Radio technology is less expensive than GPS technology and reduces privacy concerns. It still, however, requires equipment installation and the construction of a system of data collection by the insurance company.

Q. How would the premium be calculated, and how would I be billed?

A. The premium could either be calculated entirely on a per-mile basis or could consist of a fixed amount to which the per-mile premium is added. Similarly, the rate could be fixed at a per-mile cost, or could vary, depending on the vehicle location and time of day (this requires GPS / GLS technology).

There are basically two main payment options: prepayment with a credit/refund or mileage billing. Under a prepayment system, consumers would pay a premium based on an average mileage at the beginning of their term. Policyholders would be given a refund for unused miles or pay any outstanding balance. For example, if a consumer pays $720 for a 12,000 mile standard policy, but only drives 8,000 miles, he / she would receive a $240 refund; if a consumer drives 16,000 miles, he / she would owe $240. Some administrative costs would probably be associated with calculating and processing refunds or outstanding balance payments. A second option would be monthly billing, similar to that done by utilities. This method is more intensive and expensive, requiring more frequent collection of data and processing costs.

Q. If this idea is so great, why aren’t insurance companies already providing PAYD insurance?

A. Insurance companies have, in general, opposed PAYD pricing because it would mean significant changes in the way business is conducted (installing GPS units, establishing audit networks, etc.) and may reduce long-term profits by reducing gross premiums collected. Remember, though, that while the insurance company may lose money in premiums, they will also pay less money out in collision claims. The initial start-up costs can be extensive, which is why the sample bill in this package provides a tax credit for companies that offer PAYD.

The majority of the policyholders are unaware of the PAYD concept and its potential benefits, and thus have not requested this kind of service from insurance companies.(1) Research indicates widespread interest in PAYD policies among those who are aware of them. Once the option is available and publicized, companies offering PAYD policies can expect to see an increase in the number of policies as drivers with a second, seldom-driven car or those who are low-income and find insurance costs prohibitive take out PAYD policies.

Q. Aren’t factors like age, locale, and driving history far more relevant to accident risk than the number of miles driven?

A. That may or may not be true. Until recently, reliable sources of mileage data were unavailable to insurance companies, as was the ability to accurately determine a relationship between mileage and claims. Nonetheless, all of the other factors are relatively static during a policy period, whereas mileage is the one factor that can be substantially adjusted. Plus, data from independent odometer readings does show a strong relationship between mileage and claims within the current rate and risk categories.(2)

Q. Doesn’t PAYD insurance discriminate against high-mileage drivers?

A. Actually, no. PAYD increases fairness, thereby reducing the current discrimination against low-mileage drivers by charging premiums that accurately reflect the true cost of high-mileage driving.