Friday, April 24, 2009

Auto Insurance: Is “Pay-As-You-Drive” The Next Big Thing?

Do you own a car and drive very little? Perhaps your situation is like this:

• You are elderly and only drive to and from the market.
• You live and work in a small town, or work close to your home.
• You travel a lot, and your car is parked at home for days or weeks at a time.
• You are in the military, and deployed outside the US for many months at a time.
• You own a pickup truck that you only use on weekends to run errands. (that’s me)

“Pay-As-You-Drive” (PAYD) is the concept of linking the amount you pay for auto insurance to the number of miles you drive each year. The more you drive, the more you pay. The less you drive, the less you would pay.

Drivers would gain the most savings from Liability and Collision coverage. If a person carried Comprehensive insurance (fire, theft, glass breakage, etc.) on their vehicle, that likely would not change much. A car doesn’t have to be moving for there to be damages under Comprehensive coverage.

There are various ways that insurers would verify mileage under a PAYD program. Some would use GPS tracking systems that automatically tabulate and report mileage. Some use odometer checks or maintenance records.

The concept is becoming more popular in many states. Some insurers are already offering PAYD discount programs in most states. For example, Progressive Insurance and GMAC Insurance presently offer PAYD policies. Progressive ties mileage verification to GPS, and GMAC uses the OnStar system built into many GM automobiles.

PAYD has gained a strong foothold in Europe, with insurers from the UK to Italy offering the program.

Giving people a financial reward for driving less is good ecological and social policy. As with any new program, the devil is in the details, but it is very clear that the “pros” far outweigh the “cons.”

Issues relating to the “Pay-As-You-Drive” concept include:
1. Insurers must give appropriate discounts
2. Discounts must be high enough to motivate people to drive less
3. Miles driven must be monitored without violating people’s privacy

The Brookings Institute issued a report in July 2008 that estimates that the universal adoption of pay-as-you-drive plans would lead to a savings of $270 per vehicle for two-thirds of American households.

Would an annual savings of $270 be a sufficient incentive for the average American to switch to PAYD insurance? The jury is still out.

Check with your insurance company to see if they presently offer PAYD coverage. Or, check with your insurance agent to see if he writes PAYD coverage. You could save some bucks!

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