Why Mileage-Based Insurance Should Be a Federal Mandate

In this election season, we're hearing a lot about reducing the role of the federal government. Letting the states decide the issues. Turning national legislation like Roe v. Wade back to the states. Even shuttering federal agencies like the EPA. The cry for smaller government runs through both Republican and Democratic campaigns.

But then you run into something as sensible as mileage-based auto insurance, which has lingered for years in state legislatures while people who don't drive much continue to pay up to 30% more than they should for insurance. Society suffers too: an effective economic incentive for driving less is lost so accident rates remain unnecessarily high and the environment suffers. Doesn't this seem like something that should have been federally mandated?

I'm not advocating a federal mandate that insurance companies offer Pay-As-You Drive (PAYD) -- I do believe in free markets -- but a mandate that states figure out how to adjust their labyrinthine insurance statutes to accommodate this potentially game-changing option. With a deadline.

Mileage-based insurance or PAYD was first explored in 1925. Since then, the issue has been studied and analyzed and reformulated dozens of times. With the advent of technology that would allow real-time mileage monitoring, the issue gained steam among environmentalists, social justice advocates and safety proponents, all of whom found remarkable benefits from PAYD.

And for a time, the federal government seemed poised to get involved. In 1998, the US Environmental Protection Agency sponsored an effort to examine concerns expressed about PAYD auto insurance. The idea was to explore a reformulation taking into account issues of pricing and availability in states whose statutes were created around time-based policies. In 2001, Texas, a state that had no statutory restrictions that would block PAYD, was the first to allow it. The major insurance companies also began to look seriously at the market, exploring the method that the monitoring would take and creating actuarial tables to help determine pricing.

I'd never heard of PAYD or mileage-based insurance until I read about it in a newsletter from Climate Solutions, a local environmental organization rallying support for legislation that would allow insurers to offer PAYD to Washington state drivers. Partnering with Transportation Choices, their goal is environmental improvement: the Brookings Institute recently estimated that if all motorists bought PAYD, driving would decline by 8% and CO2 emissions by 2%. PAYD is second only to carbon pricing in effectively reducing carbon from automobiles and far more useful than HOV lanes or congestion pricing:

Source: Climate Solutions Mileage Based Insurance: Drive Less, Pay Less for Auto Insurance. Washington state is famous for its progressive politics. Its consumer protection laws are strict and its approach to environment issues among the most sensitive in the US. Yet the first bill to allow PAYD was introduced only three years ago. The bill still has not passed. Washington's insurance commissioner is eager to allow PAYD and supports the bill. What, then, is holding it up? The insurance companies that don't have PAYD offerings. According to Carrie Dolwick, Lobbyist for Transportation Choices, "Auto insurance is a mature market desperate for differentiation, and the green credential of mileage-based insurance is very attractive. Some companies have jumped in and already have equipment and pricing/actuarial tables all worked out. Those that have not are concerned about their competitive advantage." Ah, unfettered capitalism at work. PAYD programs were delayed in most states until the late 00s; 10 states still don't allow them. States that could have avoided insurance company heel-dragging had to give up benefits that mitigate problems of poverty, accidents and CO2 emissions. Isn't this what we look to the federal government to avoid?

 

Comments

[Carl Caroli]

04:12 PM on 01/20/2012

It's good to have lobbyists. Anything that cuts into profits becomes high profile arm twisting material.

[NKY Insurance]

08:31 AM on 01/20/2012

I support the underlying goals, but I have privacy concerns about allowing a monitor in my vehicle. What other data would be collected and how would that be used in marketing, claims and other areas beyond rate. Plus I agree with the initial commenter, rates would go down for some, but would raise significantly for others. Its essentially a business driven consumption tax.

[walstir]

02:15 AM on 01/20/2012

Mileage based pricing for insurance is not going to reduce the total payout and therefore will not reduce the total premium income required to fund car insurance. What it will do is redistribute the premium burden. Those who will pay more for their insurance form a significant constituency who will resist any change that increases their costs. Also, mileage is only one factor that determines accident risk. Some low mileage drivers are probably higher higher risks that other drivers such as new teenage drivers who do not do long daily commutes in their cars or drivers in their eighties or nineties. Onboard black boxes that monitor driving quality and speed as well as mileage can provide a better means of assigning risk premiums for car insurance.

[Jim Marusak]

12:47 PM on 01/20/2012

the onboard black box or GPS monitoring unit brings on a major constitutional problem though. you force it as the only way to get insurance in states, and it goes down to defeat in a court fight as an issue of "unreasonable search and seizure" as well as the right "not to incriminate yourself" in the 5th amendment. until safeguards are in place in which those aren't violated, then it's not going to happen or be tolerated.

[walstir]

06:59 PM on 01/20/2012

There is no need for drivers to be mandated to use an insurance product that requires monitoring regardless of whether mileage, quality and speed are all being monitored or just mileage. Insurance companies need to be mandated to make such insurance available for those drivers who prefer to use this model. Low risk drivers will be eager to purchase a product that prevents high risk drivers from downloading part of their insurance costs onto low risk drivers.