When I first started here at NRDC, I did not expect to become an auto insurance advocate.  But on closer analysis, it just made sense.  Like the cost of gas, or a toll you might pay to cross a bridge, the price of auto insurance helps you decide how much to drive, or whether to drive at all. 

Now, as we know, Californians are driving less, yet many of us are still paying the same for auto insurance.  Shouldn’t we pay less if we’re driving less?

Clearly the answer is yes, but a recent report card from our friends at Consumer Watchdog tells a different story: none of California’s top 10 auto insurers could offer recognizable savings on premiums when customers drove less.  Auto insurance is like an all you can eat salad bar: you pay the same price regardless of whether you eat 10 plates or a single crouton. 

Now there are any number of things wrong with this: low mile drivers subsidize high mileage drivers; poor drivers (who tend to drive less) subsidize rich drivers (who drive more); and without matching the cost of insurance to how much we use (imagine if everyone paid the same flat fee each year for gasoline!) we’re encouraging driving and all its associated environmental problems.

It is far better to have each driver pay for how much they drive, which is how  Pay As You Drive, or "PAYD," insurance works.  Last year, the Brookings Institution released a report on PAYD that laid out significant benefits, including driving reductions as high as 8% (or about the same as with an extra $1.10/gallon gas tax).  That means less air pollution and fewer greenhouse gas emissions.   

But there’s more: PAYD insurance promotes fairness, as low mileage drivers will no longer subsidize high mileage drivers.  Reductions in driving also improve public safety by reducing collisions and collision-related injury. It also saves money: PAYD could save 2/3 of California households an average of $250 on their annual transportation expenses.

A now there’s another benefit: a PAYD approach will help insurance companies remain competitive.

A report from insurance industry research group, Quality Planning Corporation, shows what many others have been been saying for a long time: there is a strong correlation between miles driven and insurance claims cost. And the report goes on (in its auto insurance technical speak kind of way) to encourage companies to better correlate miles to premiums:

companies with more mileage bands in their rating plan can benefit by the improved risk segmentation and pricing, and enjoy an advantage over their competitors (as long as they have an effective strategy to verify their customers’ annual mileage every year). Conversely, if they do not assign the correct mileage categories for a policy, or if they have very few mileage bands in their rating plan, they risk losing customers, losing revenue, and facing higher claim costs not adequately covered by the premium they charge.

All of this is good news.  In the coming weeks, we expect California Insurance Commissioner Steve Poizner to release his latest proposed regulations to permit and encourage PAYD policies here in California.  NRDC has been active in the process leading up to these regulations and will remain engaged, promoting PAYD as a consumer-friendly, eco-friendly transportation policy for America’s largest auto insurance market.