Pay as you Drive Insurance

Pay as you drive automobile insurance, where customers pay a mileage-based (or time-based) fee rather than a flat rate based on various general population characteristics, is meant to bring more into balance the costs incurred by an individual with the insurance premium price.  Vehicle usage is not the only factor in determining price; other risk factors that are used in conventional insurance premiums are also included.  Evidence has shown that other price structures, which do not take both usage and personal risk-factors into account, will overcharge low-mileage drivers and undercharge high-mileage drivers.Fast Company Implementation of this scheme obviously requires the tracking of vehicle use.  This poses several challenges.  Individuals need to be trusted to report truthfully; technology has to be developed to passively track vehicle use; and/or, random verification checks have to be performed by officers of the insurance company.  Not to mention individuals’ privacy concerns.  But, the rewards may be worth it.  Because paying per usage unit forces a driver to take into account the “true costs” of driving, it can reduce vehicle use, especially among high-risk drivers (which could be good for insurance companies as well as society as a whole).

Privacy concerns aside, the prevalence of wireless- or GPS-enabled onboard computers in automobiles enables tracking vehicle use passively, so technologically data collection is becoming more feasible.  It can even be used to track when and where the vehicle is driven, rather than just how far – data that is extremely valuable to regional transportation planners.

Progressive, an auto-insurer in America, now has a product called Snapshot, which is a physical device drivers connect to their car’s computer to track various data: number and time of miles driven, incidents of hard-braking or quick acceleration, and speed.  Each of these factors can feed into the pay-as-you-drive rate for an individual, though currently Progressive does not punish for bad driving, only reward for good driving.  Because of the privacy concerns, the device also is not GPS-enabled.

Nonetheless, the whole scheme appears to be taking off (several case studies are listed by the Victoria Transport Policy Institute under “Examples and Case Studies” here).  As the technology becomes more prevalent and drivers get more used to the concept, privacy concerns may abide.  It’s an especially rosy prospect for insurance companies as well, since lower premiums for good drivers will lure in new low-risk (i.e. low-cost) drivers.  Another case of better data providing for better personal, economic, and environmental outcomes.

- Terra Curtis