Pay As You Drive (PAYD) Insurance Cuts Premium Costs

July 5, 2010

If you have a car that is driven less than 15,000 miles, you might want to consider converting to Pay As You Drive insurance, also known as PAYD. This type of auto insurance also puts you in better control of the premiums you pay.

PAYD is not available in every state, but knowing about the theory behind it and how it works is beneficial to all drivers. The concept is to determine premium cost based on how much, where, when and in what manner you drive. This is done by anything as simple as recording odometer reading (in the least sophisticated systems) to installing telematic devices in the vehicle. These may or may not be GPS based technology.

The concept was investigated in detail by the Brookings Institution in 2008. It projected that 66 percent of households would pay less for auto insurance and that the savings would average $270 per car. The idea is that the current system of clumping together all drivers who are similar in regards to age, gender, location and driving record with no consideration for number of miles driven is “inefficient and inequitable”.

The benefit to society is that as drivers attempt to control their costs the general population can capitalize on the reduction of pollution, fuel savings and safer roads created by diminished traffic. Bookings estimated that “driving would decline by 8 percent nationwide, netting society the equivalent of about $50 billion to $60 billion a year by reducing driving-related harms.”

Some insurance companies have taken PAYD to the marketplace. Progressive, under the name MyRate is selling this concept in selected states, while Liberty Mutual is selling OnBoard Advisor to commercial customers. GMAC Insurance is marketing their Low Mileage Discount to OnStar subscribers who drive 15,000 miles or less per year.

Auto repair facilities have reported customers taking vehicles off the road rather than pay the insurance premiums during the current recession. PAYD may be an option available to these cash strapped drivers, since these cars are usually the secondary vehicles in the household which may be driven less frequently and therefore be qualified for Pay As You Drive coverage.    

This coverage does come with an additional price tag attached. It can be privacy since some systems need to know more than just the miles you drive. Data generated through some carriers’ systems would include where and when you drive, as well as, at what speed.

Another drawback is that these coverages are dependent on information that can be codified. The problem arises, for instance, in the telematic device’s inability to distinguish dangerous driving that can’t be as easily defined as speeding. So a hazardous driver who frequently changes lanes or drives inattentively may not be penalized with higher premiums even though his actions are as problematic as the speeder’s behavior.

An analogy has been drawn between the all you can eat buffet and the current method of rating drivers for insurance. Diners tend to eat more when their one price covers everything from the salad to the dessert. So too the driver tends to drive more when his insurance costs are not dependent on his use of the road. Why not reward those who drive less miles and therefore reduce their exposure to accidents?


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