The Pay-As-You-Drive Insurance Shift

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iStockSaving cash and the environment are top priorities for many consumers these days. In response, insurance companies in recent years have rolled out programs offering cheaper premiums for less time behind the wheel.

Pay-as-you-drive (PAYD) insurance programs, which base premiums on mileage, driving habits or both, are available from numerous insurance companies in more than half the country, and they’re gaining momentum. The shift could eventually result in lower carbon emissions, reduced oil consumption, less congestion and, because of the potentially lower cost, more insured drivers. It could also mean fewer accidents—which might produce less work for collision repairers.

A Brookings Institution report from 2008 estimated that the U.S. could save at least $34 billion annually if all motorists used a PAYD plan. The report attributes the accident reduction to an 8 percent drop in driving. U.S. motorists currently drive 3 trillion miles per year.

Merle Scheiber, director of insurance in South Dakota, one of 35 states that allows some form of PAYD program, suspects a key factor driving insurance companies to the plans is the potential for reduced claims.

“Insurance companies are always looking for ways to reduce claim frequency,” Scheiber says. “They are there to pay claims, but they don’t want to pay claims.”

Still, even if the plans become the standard, Scheiber doesn’t see a significant impact on the collision industry. That’s been the case so far, but the Automotive Service Association (ASA) is monitoring the trend for any effect it might have on repairers, says ASA spokeswoman Angie Wilson.

“It’s something they’re keeping their eyes on, but it hasn’t escalated to an agenda item,” she says.

Most PAYD programs require customers to install a wireless device that plugs into their vehicle’s onboard computer through a diagnostic port. That device monitors mileage and driving habits and can be removed easily by a repairer without affecting the data.

“The only thing collision shops would need to know about the device is that if they need to use the port the device is plugged into to do diagnostic work, they can simply remove the device to do the diagnostics and then plug the device back in when they’re done,” says Brittany Senary, a spokeswoman for Progressive.

Progressive was one of the earliest companies to offer this system. Its Snapshot program tracks the number of miles driven, time of day they were driven and the frequency of sudden stops. People who drive less, go out at safer times of day and make fewer sudden stops could get a discount.

More than 100,000 Progressive customers across 29 states have signed up for the program, Senary says. That’s one out of every four Progressive customers.

She says the program doesn’t change how Progressive works with or reimburses repairers.

Other major insurance companies including State Farm and GMAC offer some form of PAYD program. An independent company in Texas called MileMeter Insurance Co. became the first in the nation to offer pay-by-the-mile insurance back in 2004. Unlike other programs, MileMeter requires customers to send photos of odometer readings rather than install a tracking device.

Michael Barry, a spokesman for the Insurance Information Institute, says another issue potentially holding PAYD programs back is privacy. Motorists need to be willing to let insurance companies essentially get in the car with them when a tracking device is involved.

But, as the need for green—in the form of cash and environmental conservation—grows, the practice is becoming more accepted.

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