Pay-As-You-Go Insurance: An Idea Whose Time Has Come?

26 Jan

Right now, car insurance generally costs the same per year no matter how many miles you put on your car. But what if you could purchase car insurance that gave you some control over your annual insurance bill? “Pay as you go” car insurance, which charges people by the mile, could save a lot of people a lot of money. At the same time, it could reduce traffic congestion and air pollution.

According to a 2008 Brookings Institution report [PDF], if all drivers in the U.S. paid for insurance by the mile, total driving would drop by eight percent. In New Jersey, they estimated it could provide an 13.5 percent reduction in driving.

Low-mileage drivers tend to subsidize high-mileage drivers, because people who drive more also tend to crash more and cost the insurance companies more. With pay-as-you-drive, insurers could lure away the low-cost drivers with lower rates, a win-win for both those groups.

And because of the uneven distribution of miles driven, two-thirds of drivers nationwide would save money under a pay-as-you-drive system, according to the Brookings report. Since lower-income drivers tend to drive shorter distances already, the distributive effect of the policy is also progressive, according to Brookings.

One reason pay-as-you-drive hasn’t been popular in the past is because until recently, it has been difficult to accurately track how far people drove. However, with both tamper-proof electronic odometers and GPS devices, measurement isn’t a big obstacle anymore.

Pay-as-you-drive is slowly spreading. In New York, Progressive insurance offers a form of it, according to the New York Post. California is also taking a lead on the issue, and Massachusetts just announced it was going to push pay-as-you-drive as part of a major climate initiative. Is New Jersey next?

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