SAVING MONEY ON INSURANCE BY CUTTING DRIVING

If you've curtailed your driving to save on gas, the insurance industry has plans for you to save money on your car insurance, too.
Car insurers have long offered low-mileage discounts based on your commuting distance to work and/or annual mileage. Now they're considering ways for you to pay for car insurance based on exactly how much you drive. It's called usage-based car insurance, also known as "pay as you drive" or PAYD. A device in your car tracks your actual mileage and come renewal time your rate is partly calculated on your usage — and potentially even your driving habits and aggressiveness on the road.
The rocky road to
pay-as-you-drive insurance

There are three main hurdles to changing the face of car insurance to pay-as-you-drive, according to insurers:
Technology

First, technology must support the idea. A device to track driving is needed and devices vary among insurance companies. It must send the data without drivers being inconvenienced by sending it themselves.
Privacy

Second, drivers must be willing to be "observed" by their insurers via the data stream. Privacy remains a big question mark for consumer acceptance of pay-as-you-drive insurance. However, so far drivers have shown willingness to sacrifice privacy in exchange for saving money.
State regulations

Third, state regulators must approve the new programs and rates. "In some states it's an education process," says Hutchinson of Progressive. "It raises a lot of questions."

Some insurers have been working toward this moment for years. Progressive, for example, has been testing and refining usage-based programs since a 1999 Texas test. "We put our toe in the water," says Richard Hutchinson, General Manager of Progressive's MyRate program, the newest incarnation of Progressive's pay-as-you-drive insurance program.

With MyRate, Progressive is going full throttle into usage-based insurance. The program is currently available in Alabama, Michigan, Minnesota, New Jersey and Oregon. The company plans to offer it in four more states by the end of the year and nationwide by the end of 2009.

Here's how it works: A device that plugs in under your steering column collects data on your mileage, when you drive, how often you drive and how you drive. Data is sent automatically to Progressive from the device via a cellular connection. Conventional factors such as your age, location, vehicle and driving record are still used in addition to usage in setting your car insurance premium.

"This empowers you to control your insurance costs," says Hutchinson. Savings can go as deep as a 60 percent discount on the liability and property-damage portion of your insurance bill (that's if you're sitting at home most days). However, it could also backfire: Someone who logs a lot of miles, or who drives like a crazy person, or who drives a lot after midnight (a high accident-rate time), could see a 9 percent surcharge.

David Snyder, Vice President of the American Insurance Association, an industry trade group, notes that insurers have long based rates partly on miles driven, but one driver's miles can be very different from another's in terms of risk exposure. For example, 10 miles driven on a back road at midnight carry far more risk than 10 miles driven on the highway on a sunny day. Tracking devices pinpoint some of this risk.

Road ragers need not apply. Sudden braking and acceleration, such as accelerating more than 7 mph in one second, boosts your insurance rate under Progressive's program. Even if you drive in a relatively calm manner, you may simply not like the feeling that every time you slam on the brakes or go for a midnight ice cream run, your car insurance rate is creeping upward.

"People have different views on whether it's an invasion of privacy," says Loretta Worters of the Insurance Information Institute (III). "But people are willing to do it for the rate reduction."

The savings range will depend on your state. For example, Progressive's Alabama customers can see discounts of 40 to 0 percent, with no surcharge range, and have a "technology expense" of $5 a month.

Computing car insurance premiums to take into account how much you drive, when you drive and how you drive gets complicated. According to the 2008 rating manual filed by Progressive with the Alabama department of insurance, MyRate customers can fall into one of over 400 "usage-based insurance groups" depending on their driving habits. To be eligible for discounts, drivers must fall into one of the first 75 groups.

Recipe for savings

How to whittle down your car insurance cost:

Usage-based car insurance
+
Limited driving
+
A minivan
+
The highest deductibles you can afford
+
All the discounts to which you're entitled

Progressive customers can check their "Trip Details Log" driving profile online, sort trips by date and type of trip, and see their anticipated future discount. They can also drop out of the MyRate program any time and return to a standard policy if they don't like their expected new rate.

"You have to pay some attention because you could end up in a higher position," explains Hutchinson. "People are reducing their mileage and this fits nicely. It's a good idea for some drivers out there. We're not trying to shove it at them." In addition, you can choose MyRate for one vehicle in your house but not the others. If you have a car that sits in the garage most of the time, MyRate would garner you large discounts.

Progressive holds three patents related to its usage-based system.

While Progressive is first out of the gate in implementation of usage-based car insurance, there's a pack forming at the starting line. But some competitors may have an entirely different idea about how to run this race. Here's what some of the nation's other auto insurers are willing to admit about their plans.

Allstate spokesperson Raleigh Floyd says that in the company's various tests of usage-based insurance, "Our focus is the driver, not the miles driven. When it's all fully baked, we hope to make drivers smarter about their own habits and make that an incentive rather than the mileage."

Allstate is in the early stages of testing multiple devices, including a GPS box that monitors traffic and works with other "smart devices" to prevent accidents. Speed data is another testing element. Allstate is looking at what information drivers appreciate and what they don't. "It may be too intrusive to hear, 'You took that turn too fast!'" says Floyd. Some devices in the test tell drivers when they're driving at optimal fuel-efficiency. "We're testing what people would prefer and based on results we'll land with something we want to go broader with." Volunteers for the testing do not pay usage-based rates.

"We have no idea where this is going to go."
— Raleigh Floyd, spokesperson for Allstate

Allstate won't speculate on a launch date — or even divulge when testing began — but "it feels like what's next," says Floyd. "It's true innovation for us. Customers are telling us what works and what doesn't. They will have a huge say in what makes it to market. We have no idea where this is going to go."

A spokesperson for Erie Insurance, which recently earned the No. 1 spot in auto insurance customer satisfaction in J.D. Power and Associates' 2008 rankings, says the company is in the "exploratory phase" of usage-based insurance. In a test with 500 volunteers in Pennsylvania and Ohio, Erie is tracking speed, mileage, and acceleration and braking. Results do not affect premiums of the volunteers.

A GEICO spokesperson says only that the company "continually evaluates factors that influence loss propensity such as miles driven in order to be able to offer the lowest possible prices to our customers."

GMAC Insurance is using GM's OnStar system to track mileage and offer low-mileage discounts. Drivers must have a subscription to OnStar in order to participate.

The Hartford has completed a six-month usage-based test using policyholder volunteers in Connecticut. GPS devices were used to track mileage and other data. The Hartford is now analyzing the results. "We're aware of the advances that have been made in this space," says Michael Concannon, Senior Vice President of Personal Lines Insurance, adding that, "We have not seen a cry out for usage-based rating."

A State Farm spokesperson says the company is testing on a small scale in Oregon to determine the feasibility of usage-based insurance. Customers in the test have devices installed that track only speed and are not paying usage-based rates.

AIG and Nationwide spokespeople say their companies don't offer usage-based programs.

Benefits beyond insurance rates

Drivers participating in pay-as-you-drive car insurance have hit upon other advantages to the programs. Worters of III observes that parents use the "black boxes" to track teens' driving habits and speeding.

"If your current mileage does not change but all other vehicles reduced their mileage by 10 percent, you could expect a 7 percent reduction in crash risk."
— Todd Litman, Victoria Transport Policy Institute

If pay-as-you-drive car insurance takes hold and drivers everywhere trim mileage in order to save money, it will ultimately benefit everyone. According to a 2005 report titled "Pay-As-You-Drive Pricing and Regulatory Objectives," by Todd Litman of the Victoria Transport Policy Institute, "Reductions in total vehicle travel may provide proportionally larger reductions in total crash costs, since about 70 percent of crashes involve multiple vehicles, and the average crash results in about 1.5 claims. . . . If your current mileage does not change but all other vehicles reduced their mileage by 10 percent, you could expect a 7 percent reduction in crash risk, since 70 percent of your crashes involve other vehicles. If you and all other vehicles reduce mileage by 10 percent, you could expect a 17 percent reduction in total crashes." adultpicturess.blogspot.com

A June 2008 pay-as-you-drive report by Litman also states that the programs can result in pollution and emissions reductions: "If applied to all vehicles it will achieve approximately a third of the Kyoto emission reduction targets for private vehicles."

It's an attractive proposition. "Some states have asked if we'd launch in their state," says Hutchinson, particularly states concerned with miles traveled and greenhouse gases.

"More and more, acceptance is climbing," observes Hutchinson. "People view insurance as part of overall transportation costs and they're looking for relief."