As of right now, Sullivan Insurance & Financial has no idea how or even IF Massachusets will adopt PAYD (Pay as You Drive) auto insurance, but we are definitely keeing a close eye on this relatively new and innovative way of incentivizing driver to drive less and thereby help to ease traffice, prevent accidents, and reduce tailpipe emissions. Our current insurers offer up to 12% Low Mileage discount for policy holders, and by our calculations - that is even lower cost than this PAYD program (given average coverage limits). So - if you have not had a review in the past 6 months, we highly recommend one to ensure you are properly advised, protected and not paying more than necessary for your insurance.
Below is a message our insurance agency received about Pay as You Drive Auto Insurance (PAYD) from the Massachusetts Association of Independent Agents - know you know as much as we do!
From the Massachusetts Association of Independent Agents (www.massagent.com):
On December 29, 2010, Secretary of Energy and Environmental Affairs Ian Cooper presented a report to the Legislature on the proposed Clean Energy and Climate Plan for 2020 which was prompted by the passage of the Global Warming Solutions Act (MGL c. 210). The plan’s purpose is to achieve a statewide greenhouse gas emissions limit which is 10 to 25 percent below the 1990 emissions level.
Included among the steps to achieve the reductions in greenhouse emissions is a pilot Pay As You Drive (PAYD) insurance program. According to the report, “PAYD would convert a large fixed annual premium into a variable cost based on miles traveled, creating a major incentive to reduce discretionary driving, while cutting the overall cost of insurance due to fewer accidents. Miles driven would fall substantially, along with CO2 emissions and costs for gasoline, accidents, and congestion. The Commonwealth plans to conduct a PAYD pilot program initially, and, depending on results, consider working with the insurance industry to make this payment method more widely available in future years. Benefits from PAYD would depend on its degree of adoption by insurance companies and consumers.”
The report goes on to discuss benefits from full-scale PAYD implementation, clean energy economic impacts, design issues, legal authority, implementation issues among other issues.
When discussing PAYD in other states, the report said, “PAYD does not exist as a mandatory system anywhere in the U. S., but several insurance companies have pilot programs, including Progressive Insurance and GMAC. Pilots are also taking place in the United Kingdom. Several states are attempting to encourage PAYD, including Texas, California, and Oregon. The Federal Highway Administration is making available about $10 million for PAYD pilots in the next fiscal year. Fourteen states have PAYD in their climate action plans. Maryland forecasts that PAYD has the potential to reduce GHG emissions there by 1 million tons in 2015 and 4.3 million tons in 2020.”
The Executive Summary and Overview of A RISK ASSESSMENT AND REPORT ON CONSUMER, INDUSTRY AND ENVIRONMENTAL BENEFITS by MIT Professor Joseph Ferreira, Jr., and Eric Minikel provides a clearer picture of what the PAYD proponents hope to achieve. We’ve reproduced those portions of the study here:
Each year, Massachusetts drivers are driving more, and with each additional mile driven, levels of global warming pollution rise. The prospect of tying auto insurance rates to miles driven, called Pay-As-You- Drive auto insurance (PAYD), offers the opportunity to improve the accuracy of auto insurance rating while reducing vehicle miles traveled (VMT) and corresponding accident costs as well as reducing fuel consumption and greenhouse gas emissions.
Pay As You Drive auto insurance is a win for consumers, insurers and the environment:
- Consumers can save money; they will only pay for the coverage needed based on how much they drive.
- Insurers can improve the accuracy of their rating plans while providing an incentive to reduce the number and cost of auto accident claims.
- The environment will benefit from the reduction in driving that PAYD incentivizes – less driving means reduced fuel usage and lower greenhouse gas emissions.
The Conservation Law Foundation (CLF) and the Environmental Insurance Agency commissioned a study to assess the risk/mileage relationship using actual insurance claims information in Massachusetts. This study (“Ferreira and Minikel 2010”) offers the largest disaggregated analysis to date of the risk/mileage relationship and the actuarial basis for PAYD. The work analyzes data on $502 million worth of claims on almost 3 million cars driven an aggregate of 34 billion miles. The study confirms the statistical soundness of pay-as-you-drive auto insurance pricing and indicates that the PAYD approach would result in significant reductions in miles driven, green house gas emissions, and auto accident losses without adverse equity impacts to drivers.
PAYD Saves Money and is a More Accurate and Fairer Method to Price Auto Insurance
- By basing premiums at least partly on mileage, PAYD provides individual policyholders more control over their insurance costs and more accurate premiums for the type of driving they do.
- PAYD pricing reduces inequities by eliminating the subsidies low-mileage drivers currently pay for high-mileage drivers in the traditional pricing system.
- Even though suburban and rural car owners tend to drive more miles than urban car owners, their per mile charges would be lower. If they drive less than the average for their area, they would pay less for actuarially-priced PAYD insurance than they do today under the existing system.
PAYD Reduces Vehicle Mileage Traveled (VMT), Accidents and Fuel Consumption by 5/10%
- Switching all Massachusetts drivers to pure per mile auto insurance pricing would reduce mileage, accident costs and fuel consumption by about 9.5%. An alternative model with a flat yearly rate plus per mile pricing after the first 2,000 miles would reduce these measures by about 5%.
- These reductions could range between 3 and 14% depending on a number of variables like fuel prices. But even the study’s lowest plausible VMT reduction (2.7%) would save more than a billion miles annually and millions of tones of GHG.
- Negative impacts of congestion will decrease under PAYD, particularly for urban driving.
Pay As You Drive (PAYD) auto insurance converts the traditional lump-sum yearly insurance payment into a cents/per/mile rate, thus providing drivers with an opportunity to save money and an incentive to reduce mileage. For decades, researchers have touted PAYD’s potential to reduce automobile accidents, congestion and greenhouse gas emissions while also improving equity over the current system. It appears that PAYD carries large potential benefits both for individual policyholders and for society as a whole, yet it has seen limited application to date, due in large part to economic and regulatory barriers. Congestion, pollution and some fraction of accident costs are all externalities, so any individual insurance company would see just a portion of the benefits of PAYD, even while incurring the full transaction and monitoring costs. Meanwhile, many state insurance regulations either prohibit or inhibit PAYD.
However, new technology has lowered transaction and monitoring costs and awareness of global warming has sparked a new state-level push for ways to reduce VMT without increasing consumer costs. From a policy standpoint, PAYD seems an increasingly appealing and feasible prospect, yet from an actuarial standpoint, it is still in need of further study. While it is clear that risk increases with mileage, the precise nature of the relationship at the individual level is not well understood. Most research on PAYD to date has examined mileage and risk data at a highly aggregated level, comparing, for instance, across U.S. states.
This report offers the largest disaggregated study to date of the risk/mileage relationship and the actuarial basis for PAYD. Linking recently released insurance and mileage data from the Commonwealth of Massachusetts for the 2006 policy year, we analyze the correlation between annual miles traveled and insurance risk for over three million individual vehicles insured on private passenger insurance policies and categorized by rating class and territory.
We begin by matching 2006 policy year earned exposure data to claims data for bodily injury and property damage liability, plus personal injury protection coverages— i.e., the compulsory, and therefore fairly uniform, types of insurance coverage. Next we create estimates of each vehicle’s annual miles traveled based on odometer readings from mandatory safety checks. In addition, we obtain fuel economy estimates for each vehicle thanks to commercial Vehicle Identification Number (VIN) decoding services provided by VINquery.com. In all, we are able to analyze data on $502 million worth of claims on 2.87 million car years of exposure covering vehicles driven an aggregate of 34 billion miles.
We find a strong relationship between miles driven and auto accident claims frequency and loss costs. This relationship between risk and mileage is less than linear when all vehicles are considered together, but it becomes considerably more linear when class and territory are differentiated. Using pure premium as our measure of risk, we regress risk on mileage using a variety of models. We find that mileage is a highly significant predictor of risk but, used alone, provides less explanatory power than traditional class and territory factors, so a single, universal per mile insurance rate for all drivers would be inappropriate. However, a combined model using mileage along with class and territory groupings explains more risk variation than a similar model without mileage. In fact, mileage gains in its own explanatory power when used in conjunction with class and territory, probably because class and territory provide some control on where and how the miles are traveled. This suggests that telematic pricing that varies per mile rates based on when, where and how miles are traveled could improve actuarial accuracy even further and may even obviate the need for some traditional insurance rating factors.
Absent telematic pricing, PAYD insurance is most likely to be practical and effective with differential rates for customers in different classes and territories. Since low-mileage policyholders have higher per mile risk, and since there are fixed costs associated with writing an insurance policy, a pricing scheme where users purchase 2,000 miles for a flat yearly fee and then pay per mile thereafter may be more realistic and statistically sound than a strictly per mile pricing scheme.
Though PAYD is unlikely to eliminate existing class and territory distinctions, it appears to have positive equity implications. PAYD would improve fairness by shifting weight in insurance pricing towards an individually controllable factor, mileage, rather than involuntary groupings, and by reducing or eliminating the cross-subsidy from low to high mileage drivers. For low-income households, PAYD would create an opportunity to save money by choosing to reduce mileage, would make low-mileage car ownership more feasible, and would reduce the toll of auto-related externalities on the non-car owning poor.
Extrapolating from the per mile pure premiums we calculate for compulsory coverages, we estimate retail prices for full coverage for each class and territory. Under strictly per mile pricing, we estimate an average premium of 8.2¢ per mile statewide, ranging from 4.3¢ for the lowest-risk customers to 37¢ for the highest risk customers. For statewide fuel economy we observe a 20 mile per gallon average, which at the current gasoline price of $2.70 translates into about 14¢ per mile. Assuming that drivers currently consider fuel to be the only marginal price of driving an additional mile, a switch to PAYD would represent more than a 50% increase in the perceived per mile price of driving for the average fully insured Massachusetts driver. Our literature review suggests a 0.15 elasticity of miles driven with respect to the marginal per mile price. Based on this, we estimate a 9.5% reduction in VMT if all drivers in Massachusetts switched to a strictly per mile PAYD insurance plan, and a 5.0% reduction if all drivers switched to a plan having 2,000 miles bundled into a yearly fee plus per mile pricing thereafter1. Fuel reductions are almost exactly proportional, as we find that average fuel economy exhibits almost no variation by class, territory or annual mileage. Depending on a number of variables, including the amount paid per mile, the types of coverage provided, and the availability of alternative modes of transportation to drivers, the VMT and fuel consumption reductions with PAYD could range between 3 and 14%.
Our 9.5% estimate is somewhat lower than what other researchers have estimated, probably because our differentiation of insurance rates by class and territory reveals that the highest-risk territories with the highest theoretical per mile rate already have the lowest annual mileage. The reduction in accidents resulting from the reduced mileage would be similar in percentage, but could be somewhat higher or lower depending upon the relative risk of the forgone miles and the additional benefit of reduced congestion and multi?car accident risk.
Overall, the risk analysis in this study confirms the statistical soundness of pay-as-you-drive auto insurance pricing and indicates that, if the per/mile charges are sufficiently timely and certain, then the approach would result in significant reductions in miles driven, green house gas emissions, and auto accident losses without adverse horizontal or vertical equity impacts.
1 The reduction from 9.5% to 5% for the 2K+per-mile scheme is due not only to the flat charge for the first 2000 miles but also to a lower, and more statistically justifiable, per mile price.
To read he complete report (115 pages) click here. To read the risk assessment and report on consumer, industry and environmental benefits authored by MIT Professor Joseph Ferreira, Jr., and Eric Minikel click here.