Pay-as-you-drive pricing for insurance affordability. Paper presented at the national meeting of the Casualty Actuarial Society, May 2004.

This paper describes how Pay-As-You-Drive (PAYD) pricing can increase vehicle insurance affordability. With conventional pricing, motorists pay a fixed premium for unlimited mileage coverage. PAYD charges premiums by the vehicle-mile, so a lower risk driver pays 2-4¢ per mile and a higher-risk driver pays 10-20¢ per mile. This lets motorists save money by reducing their mileage, and tends to benefit lower-income motorists. Pay-As-You-Drive can be a consumer option, so motorists select the rate structure they prefer. PAYD redefines the concept of insurance affordability and offers a new approach to reducing uninsured driving. Currently, “insurance affordability” means that even high risk, lower-income motorists can afford unlimited-mileage coverage. High risk drivers have more than ten times the claims as lower-risk drivers, and so their premiums should be more than ten times higher, but this is considered unaffordable. The conventional solution forces lower-risk motorists to cross-subsidize higher-risk motorists, which is unfair and encourages high-risk driving. PAYD pricing redefines insurance affordability to mean that higher-risk drivers must limit their mileage to the amount of risk exposure they can afford. This reduces high risk driving and accidents, reducing crash costs rather than simply shifting costs between rate classes. Pay-As-You-Drive pricing provides a variety of benefits. It reduces accidents, rather than simply shifting costs from one group to another. It can increase insurance affordability, reduce uninsured driving, and provide consumer savings. It makes premiums more accurately reflect the claim costs of each individual motorist, and rewards motorists who reduce their accident risk. Because it gives higher-risk motorists the greatest incentive to reduce their mileage, it can provide large safety benefits. It is also an effective strategy for reducing congestion, road and parking facility cost, energy consumption and pollution emissions. It is currently being tested by some insurance companies. (Author/publisher)