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Justin Horner’s Blog

Drive Less, Pay Less: The New Pay As You Drive Insurance Performance Standard Shows How!

Justin Horner

Posted December 15, 2009

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I’ve been touting the environmental benefits of Pay As You Drive (PAYD) insurance for months now (see here, here, and here).  A simple transportation reform that saves people money, is more fair than current practice and helps the environment? What’s not to love?

Nevertheless, the wheels of reform sometimes turn slowly, and auto insurance, a competitive and regulated industry whose very bread and butter is evaluating risk, is sometimes slow to change.  That’s why we need to push regulators and policymakers to open doors to PAYD while working with insurance companies to encourage them to bring better products to market. 

A vital first step is getting everyone on the same page: what does PAYD mean, and how would we know a PAYD product if we saw it?  After literally decades of PAYD as a subject of policy debate and speculation, when we’re actually getting closer to implementation, we learn that a consensus definition of PAYD doesn’t even exist!

Fortunately, last week, that changed.

NRDC, Ceres and a coalition of environmental and transportation groups* released a Pay As You Drive Standard last week. The Standard will act as guidance to regulators, policymakers, insurers and even consumers who are interested in proposing, evaluating and encouraging PAYD-type insurance products.  It’s the first concerted effort I know of to standardize a definition of PAYD for the purposes of really implementing policy.

Our goal was to boil down the essential elements of PAYD and provide metrics by which to measure performance.  The goal was how to correlate miles driven to the cost of insurance as directly as possible.  We want drivers to really know (and feel) the cost of each mile they’re driving.  Here’s what we came up with:

  1. Per Mile Pricing or Narrow Mileage Bands: drivers know the price of travel instinctively when they, say, watch a taxi meter.  The price goes up every 1/8 or 1/10 of a mile, and sometimes we jump out at the corner to avoid that extra distance we just don’t care enough to pay for.  Insurance should be the same way, although such small units are not always practical.  Ideally, we’d be paying insurance by the mile, but even changing the price every 100, 250 or even 500 miles can send a clear enough signal to drivers to know how to save money.  Insurance policies that can tie premium price, and increased costs, as closely to mileage as possible will do it with per mile pricing or relatively narrow “mileage bands.”
  2. Minimum up-front costs.  We know insurers have certain costs that are constant among customers no matter how much they drive, so asking drivers to buy some miles up-front makes sense.  However, an ideal PAYD policy would keep those costs to a minimum and maximize the share of the total premium cost that can be influenced by how much you drive. 
  3. Direct relationship between mileage and premiums: On the simplest level, if a customer drives 50% less, they should pay 50% less for insurance.  Few, if any, policies these days give such a direct savings opportunity.  A true PAYD product would show clear savings with mileage reductions.
  4. Small differences between costs for each mileage band: We know that some miles are riskier than others.  In most cases, the first 15,000 miles someone drives will be more risky than, say, the 15,000 miles between 30,000 and 45,000 miles.  The price should be more for riskier miles, but not too much more, lest the price signal be weakened and the impact on driving lessened.  We recommend that the difference be no more than a factor of 2 or 3 between different mileage bands. 

Here’s the summary chart, for ease of viewing:

Rating Factors




Maximum Mileage Bands Used for Pricing




Maximum Annual Miles That Must Be Purchased




Percentage Premium Reduction from 50% Mileage Reduction




Maximum Difference Between Lowest and Highest Priced Unit




There are currently some products that may meet the Bronze standard, but there are none that we know of (yet!) that would hit Gold or Silver.  We hope the Standard can function like LEED or Energy Star: systems that push the market towards exceptional performance.

The Standard is still a work-in-progress.  We welcome questions, comments, complaints and all manner of feedback.  Drop me a line, or leave a comment below!

We timed the release with my presentation on PAYD before the National Association of Insurance Commissioners Climate Change and Global Warming Task Force  (thanks to Pennsylvania Insurance Commissioner Joel Ario for heading up the group!).  I’ll cover the basics of my presentation in a later post.  

(* Endorsers include NRDC, Ceres, Environmental Defense Fund, Victoria Transport Policy Institute, the Institute for Transportation and Development Policy, the Conservation Law Foundation and CALSTART.)

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