Pay As You Drive Insurance: Good News From California and Massachusetts

The past week's been an exciting one in the world of pay as you drive insurance (as much as anything associated with auto insurance can be exciting, that is).  

First, the two largest California auto insurers--State Farm and Auto Club (AAA) of Southern California--have had usage-based policies approved by the California Department of Insurance.  Now I admit I had concerns about the Department's plan to approve both products, but a little progress in the right direction, particularly with State Farm, is better than nothing at all.  As a Deputy Commissioner from the Department said in the LA Times,  "Once there is a sense of how this is working for State Farm and the Auto Club, more insurers will be compelled to offer the same thing." (hopefully with some improvements).

On the East Coast, a fantastic new report on PAYD from the Conservation Law Foundation and the Environmental Insurance Agency was released last week.  It's the first analysis of the relationship between mileage and claims using real, actual data from drivers in Massachusettes (most other studies have averaged mileage and claims together, which is good, but not ideal).  The study confirms what a growing body of research says: more miles equals more claims.   This means that PAYD not only encourages and rewards less driving--helping the environment--but it's also a more accurate way of insuring cars--which helps drivers and insurance companies.

The study also tested a couple of model PAYD policies and estimated the resulting cash savings for drivers and reduction of driving for the environment.  The results were impressive: a 9.5% reduction in driving for a policy that priced each and every mile, and a 5% reduction in driving for a more realistic policy that requires a minimum purchase of 2000 miles per year and prices every mile thereafter (and which happens to match a Gold on NRDC's own PAYD Standard) .

In either case, the news is good, and the real-life numbers and the top-notch analysis from MIT's Joseph Ferreira equal an important contribution to the conversation.