Pay-As-You-Drive Car Insurance

The new issue of Democracy: A Journal of Ideas (registration, but easy and free) is very interesting.  Here is one proposal, from Jason Bordoff:

Drivers who are
similar in all respects–age, gender, driving record–pay roughly the
same premiums whether they drive 5,000 or 50,000 miles per year, even
though the likelihood of a collision increases with each mile. This
“all-you-can-drive” pricing scheme imposes significant costs on
society: more traffic accidents, congestion, air pollution, greenhouse
gas emissions, and dependence on oil.

the effect of PAYD on miles traveled and gasoline
consumption would be significant: a 6.5 percent reduction under
conservative estimates, and others suggest the reduction could be as
high as 10 percent. To put that in perspective, it would take an
81-cent-per-gallon increase in the gas tax to achieve a 6.5 percent
reduction in miles driven.

Monitoring costs seem workable, at least in principle with computerized odometers, so why don’t companies do this? 


Companies do, see
A South African company has exactly this product.

This is common in Europe. Annual driving distance, checked if you have an accident, in which case your insurance payout is limited if your odometer is more than it should be. I doubt if it has any significant impact on the length driven, unless you happen to be close to the limit in both time and distance.

Andrew Tobias proposed this years ago. And he proposed collecting it at the pump with each gallon sold. This would have the effect of gas guzzlers paying higher insurance rates than small cars. I'm not sure that's so inequitable and it would be much easier than a parallel system to collect from odometer readings.

It is not very common among drivers yet, but I can tell you insurance companies here in Italy do offer contracts in the form of PAYD schemes.

An example from England:

State Farm asks how long my typical round trip commute to work is. I know they put that into their premium.

Are we really sure that an 81-cent increase in the gas tax only decreases miles driven by 6.5%? I wonder if the studies estimating that mix cause and effect, since the price of gas is higher when people are driving more in the summer.

In the aftermath of the price shock of Hurricane Katrina, when the price of gas ever so briefly spiked above $4, the roads in Northern Virginia were Empty with a capital E. It seemed like discretionary driving disappeared. Driving on 66 with my Prius was never more pleasurable.

I suspect the measuring problem is deeper than you think.

Driving 5k miles in the city is much more dangerous than 5k miles in the country. Suppose your client lives in the suburbs, how do you determine how much of his/her miles were in the city (with a bunch of cars) versus the suburbs (where there is less congestion)?

I suppose GPS could determine how much congestion you''re driving in. Nonetheless, a computerized odometer will not be sufficient.

I'm surprised nobody has brought up privacy issues yet. Andrew Tobias' idea (collecting at the pump), pointed out earlier, though, is a reasonable solution though.

Note that the quoted paragraph leads with the condition that we are talking about a class defined by a number of characteristics. In other words, the calculation of the premium is a multivariate exercise, with different weights to different factors. Why should miles driven have a large weight (which is really what is being argued).

I fail to see how paying a 'flat rate' for insurance results in more traffic accidents et al. People are supposedly paying 'through the nose' for gasoline, and it seems to be having little effect on how much they drive. Why would pay-as-you-drive insurance change people's behaviour more than raising gas prices?

Most insurance companies in North America will ask you the distance of your commute to work and how many miles you intend to drive the vehicle over the year. Longer commutes and more annual miles may mean higher premiums.

In Ontario, Canada, you have to provide your insurance company name, policy number and the odometer reading when your renew your plates (which is either every year or two years). Supposedly, this information provided to insurance companies.

Nalebuff and Ayres devoted several pages of their book "Why Not?" to this problem -which they classified as "Can you see how the problems of too much driving can be solved? How can we get drivers to feel the pain of driving the extra miles."

After surveying an number of benefits and obstacles to the scheme, they conclude by saying "Few [insurance] companies want to embark on a course that alienates half their clientele. ... So, as long as the low mileage drivers are willing to keep subsidizing the high mileage ones, the incumbents are happy not to rock the boat."

interestingly, their solution to externality problem requires a solution to what Schelling called a mulit-person's prisoner's dilemma among insurance companies. Nobody wants to be first in the field, but everyone would be better of if more insurance companies offered the product.

GMAC is offering me a low rate for driving less. Since I have a GM car that has (1) a 12,000 mile/year lease and (b) OnStar technology, they know that I am otherwise incentivized (by the mileage penalties attached to the lease) to drive less than 12,000 miles/year, and they can easily monitor it.

I'll see what kind iof deal they offer me when my current policy is up.

Drivers who are similar in all respects—age, gender, driving record—pay roughly the same premiums whether they drive 5,000 or 50,000 miles per year,

What does this even mean? If I have the same "driving record" as someone driving ten times more miles than me, then I am getting into crashes 10 times more often. People who drive more miles get into more crashes, and therefore will pay higher premiums.

Why concentrate on a related factor (miles driven) as a proxy for what can be measured exactly (crashes)?

Rich B., auto insurance companies need a way to gauge the probability of future payout, just as health insurance companies do. A mid-30s female is less likely to require major medical treatments (e.g. cancer treatments, emergency care for heart attack, stroke, etc.) than a late-70s male.

Should medical insurance companies quote rates based only on past medical history, or based on the expected rate of future payout given all variables?

I've often wondered about this. I drive very little (less than 1/2 of what the average person does), and yet my discount is very small. I'm pretty sure the reason is that insuance companies know that if they refuse to pay claims on the grounds that the insured drove too much and thereby violated the terms of their policy, they would raise holy hell and it just wouldn't be worth it.

The final plan, of course, should involve pay-as-you-go car insurance that hooks up to GPS, and charges you based on where you drive and time of day, because driving at certain times in certain places carries risks.

In addition, insurance companies could contract with the government to create congestion pricing based on this system.

Maybe the difference in expected accidents (and more importantly, expected insurance payouts) between someone driving 50,000 miles and someone driving 5,000 miles isn't all that big. Traffic accidents, especially expensive accidents, are rare enough that I don't think us non-experts on the subject have any idea how the relationship works. I'd imagine that driving *patterns* make a lot more difference than total miles, though, and I'm fairly certain that driving records provide a much better prediction than either. In fact, total miles driven might already show up and be factored in as more traffic tickets.


Insurers utilize many variables to measure a risk (including all of those you mentioned), with one chosen as the “exposure base† variable, and the rest used as “rating variables†. The insurer will charge a “base rate† for each unit of the exposure base, and this base rate will then be modified, depending on the values of the other rating variables.

In the canonical pricing model, the ideal base has a uniform relationship with the level of risk, and so the selected base variable is whichever best displays this relationship. The current most used exposure base is the car-month, which is largely recognized to be an inferior exposure base compared the car-mile.

Once the exposure base is chosen, the impact of the other rating variables on the amount of risk the insurer assumes is modeled, by one statistical technique or another. The modeling incorporates all of the standard caveats which pop up in multivariate statistical modeling.

Are we using GPS or just the odometer? I wouldn't feel like I was being tracked if it was just the odometer; who knows where I went or when? If it's GPS, expect to read "wife files for divorce after GEICO's GPS shows husband was at brothel/crackhouse." Crack also being a good reason to raise car insurance rates.

"Miles driven do not correlate strongly to damage done to others"

This may be true in the aggregate - but once each drivers' base behavior is known (likelihood of reckless driving, let's say), then miles driven most definitely DO correlate strongly to damage done to others.

And, again, the number for "drives relatively little" is still very high - providing a big part of the high ratio between fixed cost and variable cost for driving which is a major component of why people who already own cars aren't willing to leave them at home and use alternative transport. Which, ironically, again works against the insurer - they aren't going to pay out if I take the bus, after all.

Yeah, uh, put me down as objecting for privacy considerations. I don't trust my government—regardless of the administration—to know where my car is at all times†¦and I don't trust my insurance company one iota more with that sort of information.

"This may be true in the aggregate - but once each drivers' base behavior is known (likelihood of reckless driving, let's say), then miles driven most definitely DO correlate strongly to damage done to others."

OK, but how well can insurers determine a good "base behavior"? Without GPS-tracking their every movement (which is not the same as just checking the odometer reading for the mileage), I'd say not very well. At least not in the case of a driver with a clean driving record. In fact, the more miles a person drives while maintaining a clean driving record, the more likely they are to be a good driver.

That's the problem. I'd expect that most of the cost of an insurance policy, even for a driver with a clean driving record, goes to the cost of bad drivers. My property damage liability insurance of $145 for 6 months, on a male 32-year-old with a clean driving record, which pays out up to $10,000 in property damage with no deductible, implies that I have a 1 in 35 chance of totally destroying someone else's property each year. I don't think my real risk is anywhere near that high, whether I drive 1000 miles a year or 40,000 miles a year. It seems quite obvious to me that the insurance company has no clue what my true "base behavior" is. Rather, they are lumping me, in aggregate, with many other drivers with greatly varying "base behaviors". If that assumption is true, then it's easy to see that miles driven might not be strongly correlated to damage done to others.

Maybe the idea would be both more effective and less controversial if it was only applied to people with known, poor, driving records.

$10,000 is all that's required under the law, and the law is the only reason I have the insurance in the first place.

Pay at the pump for gas insurance has a couple of real benefits. 1) You no longer have un-insured drivers 2) Car sharing programs and van pools have significantly reduced costs.

These are both social goods. The bad news? Insurance companies are pretty much out of business if everyone pays their premium with their fill-up.

There was a trial of this in Texas a few years back. I never tracked the data beyond the fact that it wasn't going to be real for our car sharing non-profit. So... pointless except in a dreamable society where people make decisions for the long-term health of the society.

Go figure.

I do a form of Pay as You Drive. I have several cars and don't drive all of them very often. So I cancel the insurance and renew it the days I want to drive. With online insurance service this takes 5 minutes a day to save about 2/3 of my insurance bill. A miles based system would be easier, but doesn't seem to be available.

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Why not just offer additional auto insurance policy option
selling insurance for distance driven(5000 or 10000 miles) instead for time (6 month or 1 year). All risks can be calculated by mile the same way as by time considering age, location and so on. People concerned about privacy
just have to buy old style insurance. I believe new product will be popular in the cities with public transportation, high traffic and expensive auto insurance.

Some cities are considering a tax if you drive into the main area of town. The goal is to reduce traffic and increase commute time. Several cities around the world have tested it and apparently it works.

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Pay as you go Insurance is a good idea but from the technological point of view, the tech needs to be fairly inexpensive, reliable and tamper proof and people don't like to be monitored, which is what this system is doing.

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