Volume 7 Number 2 January 8, 2010

Sean M. ShawPay-As-You-Drive Insurance -- Will It Save You Money?

By Sean M. Shaw, Esq., Florida Insurance Consumer Advocate

Beginning April 1, 2010, Floridians will have a new choice when it comes to auto insurance. On that date, Progressive American Insurance Company (Progressive) will be the first company to offer a new product called Pay-As-You-Drive auto insurance. Pay-As-You-Drive (PAYD) or “usage-based” Office of the Insurance Consumer Advocateauto insurance, in its simplest form, bases insurance cost on the number of miles driven incorporated with existing rating factors, such as a driver’s accident history or geographical location. The fewer miles you drive the lower your premium. Policies may be based on estimated miles, verified miles and prepaid miles. For mileage verification policies, insurers could verify the driver’s miles through various methods, including periodic certified odometer readings, which can be obtained during inspections, self-reporting by the policyholder or by data transmitted by a technological device (telemetric) that connects to a vehicle’s OnBoard Diagnostic (OBD-II) port.

PAYD insurance will be offered in Florida by Progressive through their MyRate program which will go into effect on April 1, 2010 for new business and May 11, 2010 for renewal business. Upon enrollment in the MyRate program, Florida consumers (as in other states) will be mailed the telemetric device that easily plugs under the dash of your vehicle and will transmit mileage and driving behavior information to Progressive. The MyRate device does not contain global positioning satellite (GPS) technology and does not track vehicle location or whether you are exceeding the speed limit. There is also no way to determine driver identity. The program is purely voluntary on the part of each insured and insureds may continue their current rating basis without any penalty.

New products are always exciting and many consumers are curious to try out the latest product in the auto insurance world. However, PAYD insurance may not be the best choice for certain consumers. As the Insurance Consumer Advocate, I am going to help outline what types of drivers will benefit from PAYD insurance and which drivers may be best served by maintaining their current plan.

Some features of PAYD insurance will provide benefits to all drivers regardless of age and driving style. Particularly, all drivers will appreciate the environmental benefits from more responsible driving and a reduction in unnecessary driving. That means fewer accidents and less congestion, carbon emissions, local pollution and a decrease in fuel consumption, hence, less dependence on foreign oil. In addition, because PAYD insurance offers incentives for safer driving the state may experience a decrease in accidents which may result in lower premiums for all consumers. Lastly, PAYD may result in less driving which could save taxpayers money on roadwork by decreasing road-related costs. Thus, if PAYD insurance achieves its goal of inspiring more responsible driving and a reduction in unnecessary driving all Floridians may experience some benefits from this new program.

While the broad social effects of PAYD insurance may not be enough to convince everyone to switch insurance, for some consumers, additional factors may make changing to PAYD insurance very desirable. Young drivers who are responsible would benefit greatly from PAYD insurance. Rather than paying for their irresponsible peers, young safe drivers will pay less according to how well they drive. Thus, their safer driving habits could equate to lower premiums as long as they maintain a clean driving record. Again, these benefits would be available only to those younger drivers who drive safely and do not exhibit the characteristics normally attributed to younger drivers. For those young drivers who exhibit more traditional behavior, they may find that their rates may increase. Since younger drivers typically spend more time driving during unsafe hours and may be more aggressive drivers PAYD insurance would likely increase their rates.

On the other end of the spectrum more mature drivers will see a reduction in benefits if they exhibit the typical attributes associated with older drivers. Older drivers who don’t drive very often will see lower premiums as a result of fewer miles driven and safe driving habits. Retirees who no longer commute during peak driving hours will experience lower premiums as insurance companies may use the time of day one commutes as a factor in determining premiums. However, as many drivers become older, many factors such as decreased vision and reflexes lead to many minor accidents. For these consumers, any decrease in premium due to decreased drive time or distance may be offset by the frequency of minor accidents.

Now that we have discussed the two extremes let's turn our attention to the average driver. Because individual behavior varies greatly from person to person, each consumer must honestly evaluate what type of driver they are in order to determine if PAYD insurance is a good option for them. Drivers with long commutes, aggressive drivers and nighttime drivers may not see any benefits as premiums most likely could be higher. If these characteristics don’t describe you then PAYD is probably going to be an insurance option that will benefit you greatly.

If you have decided that PAYD insurance would benefit you and are interested in signing up there are some final factors that you should consider before making your decision. If you are a private person you may not be comfortable with your insurance company monitoring your behavior. Some consumer groups oppose the collection and use of any information other than mileage, claiming driving behavior would be captured in the driving safety record rating factor already being used. Monitoring driving behavior or location raises privacy and fairness concerns among some consumers. Also, some mileage verification requirements could be overly burdensome or not feasible for some consumers. For example, you may have a vehicle older than 1996 (those without an OnBoard Diagnostic (OBD-II) port) or live too far from an odometer reading site. Thus, even if you are the type of driver who would benefit from PAYD insurance these other factors may make this type of insurance less desirable.

The advantages of PAYD insurance far outweigh the disadvantages for some consumers. An obvious benefit is that you will have options that will allow you to save money by only paying for the insurance you use. Ensuring a closer connection between miles driven and premiums provides a financial incentive for drivers to reduce their mileage and rewards those who choose to drive less. Reducing mileage will benefit consumers by saving them money and benefit insurers by reducing their risk; all the while making our streets safer and cutting down on congestion, as well as government infrastructure costs.

If you are considering switching to PAYD insurance I recommend that you review your mileage history and review your current policy before switching. Any questions about PAYD insurance can be directed to the Office of the Insurance Consumer Advocate at (850) 413-5923. I also encourage all consumers to be responsible drivers and obey all traffic laws.

The Insurance Consumer Advocate is appointed by Florida Chief Financial Officer Alex Sink and is committed to finding solutions to insurance issues facing Floridians, calling attention to questionable insurance practices, promoting a viable insurance market responsive to the needs of Florida’s diverse population and assuring that rates are fair and justified.