The current lump-sum pricing of auto insurance is inefficient and inequitable. Drivers who are similar in other respects–age, gender, location, driving safety record–pay nearly the same premiums if they drive five thousand or fifty thousand miles a year. Just as an all-you-can-eat restaurant encourages more eating, all-you-can-drive insurance pricing encourages more driving. That means more accidents, congestion, carbon emissions, local pollution, and dependence on oil. This pricing system is inequitable because low-mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average. A better approach is simple and obvious: pay-as-you-drive (PAYD) auto insurance. With PAYD, insurance premiums would be priced per mile driven. All other risk factors will still be taken into account, so a high-risk driver would pay a greater per-mile premium than a low-risk driver. With insurance costs that vary with miles driven, people would be able to save money by reducing their driving, and this incentive would lead to fewer driving-related harms. PAYD would also be more equitable because it would eliminate the cross-subsidization of insurance costs from low mileage to high-mileage drivers. Given these potential benefits, there has been increased interest in California recently in encouraging PAYD insurance. The California Department of Insurance has undertaken a rulemaking process, and a bill is pending in the state Senate (AB 2800), both of which are aimed at overcoming various obstacles to offering PAYD in California. For example, Proposition 103 requires that mileage be among the top three factors on which auto insurance premiums are based, yet the regulations implementing Proposition 103 may actually stand in the way of offering true per-mile pricing. Those regulations may prohibit an insurance firm from charging a PAYD customer whose vehicle miles traveled (VMT) was verified a lower premium than a customer of identical risk profile whose VMT was not. Such a prohibition would preclude offering low-mileage drivers a premium that more accurately reflects their risk because other low-mileage drivers are paying a different (and higher) rate. In addition to the efforts to overcome such barriers, the California Air Resources Board (CARB) is also considering PAYD as part of its Draft Plan to lower the state’s greenhouse gas emissions to meet its 2020 limit under AB 32. This paper is intended to help policymakers and the general public understand and evaluate the potential impact of PAYD in California. It is based on a recently-released study of PAYD in the United States, “Pay-As-You-Drive Auto Insurance: A Simple Way to Reduce Driving Related Harms and Increase Equity,” published by the Hamilton Project at the Brookings Institution. (Author/publisher)
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