Early Success for Pay-As-You-Drive (PAYD) Vehicle Insurance in California

Nearly three years ago today California Insurance Commissioner Steve Poizner proposed a voluntary pay-as-you-drive (PAYD) insurance option for California drivers. At the time, state regulation prevented insurance companies from offering PAYD Vehicle Insurance, or any equivalent option, to consumers.

For those unfamiliar, the Victoria Transport Policy Institute’s TDM Encyclopedia defines PAYD vehicle insurance in the following manner:

PAYD Vehicle Insurance (also called Distance-Based, Usage-based, Mileage-Based, Per-Mile Premiums and Insurance Variabilization) means that a vehicle’s insurance premiums are based directly on how much it is driven during the policy term. The more you drive the more you pay and the less you drive the more you save. This can be done by changing the unit of exposure (i.e., how premiums are calculated) from the vehicle-year to the vehicle-mile, vehicle-kilometer or vehicle-minute. Existing rating factors are incorporated so higher-risk motorists pay more per unit than lower-risk drivers.

Poizner’s proposal received support across a broad coalition of stakeholder groups from environmentalists and insurance companies to civil libertarians and consumer advocacy groups. The Los Angeles Times reported Poizner saying:

I am thrilled to pave the way for California drivers to obtain insurance that is more environmentally friendly and more accurately reflects driving habits. As a strong advocate of healthy market competition and a healthy environment, I am especially pleased to encourage this kind of innovation and additional options for consumers.

Earlier this week Daniel C. Vock, a staff writer for Stateline, highlighted the early success of California’s new PAYD insurance option. Vock writes:

The state’s Department of Insurance gave companies the green light last year to charge customers based on the number of miles driven, with the goal of cutting back traffic and saving drivers money. Insurance carriers like the change, because it lets them get more information on driving habits and charge appropriately.

Already, more than 80 percent of policyholders with the Auto Club of Southern California are using the new plans, which were first offered in February, says spokesman Jeffrey Spring. The auto club expects that number to climb to more than 90 percent.

State Farm, the nation’s largest auto insurer, would not reveal how many of its California customers have opted for the mileage-based plans. But last year, it predicted a quarter of them would choose the new option, saving the drivers $31 million. Bob Devereux, a spokesman for State Farm in California, says the new pricing scheme received a “very positive response.”

“It puts the customer in the driver’s seat,” he says. “(Customers) like the fact that they have more control over their future premiums.”

California’s early success is praiseworthy for one reason in particular: it’s voluntary. Further, California lawmakers resisted the urge to implement by fiat and instead enabled the marketplace to determine and meet consumer needs. Private insurance companies like the Auto Club of Southern California and State Farm then devised effective incentive plans to encourage consumers to make the switch. Lawmakers basically decided to legalize insurance companies providing insurance — and it’s working.

California policymakers were able to satisfy privacy concerns by adopting a unique approach. In California, drivers can voluntary adopt PAYD vehicle insurance and can comply by reporting their mileage driven through verified odometer checks. Insurance companies in other states (such as Illinois, Ohio, Colorado and Texas) offer a range of alternatives using different technologies.

Reason Foundation policy analyst Skaidra Smith-Heisters advocated for this approach in a December 2008 commentary available here. For more, see the Victoria Transport Policy Institute’s TDM Encyclopedia entry on PAYD Vehicle Insurance here.