Pay-As-You-Drive (PAYD) automobile insurance bases premiums on the number of miles the customer drives. It stands to reason: the less you drive, the less likely you are to be involved in a traffic accident. As it also happens, the less you drive, the less you contribute to traffic congestion. Thus, it is in the interest of state transportation policy makers to encourage the adoption of PAYD insurance.
PAYD is one of the pricing strategies explored in Smart Growth America’s new policy manual, “The Innovative DOT: a handbook of policy and practice.” In the third of eight focus areas, the manual also makes a case for congestion pricing on toll roads. That’s a topic I have addressed extensively elsewhere, and Virginia is already a leading practitioner, so I will not dwell upon it. Instead, I will focus on PAYD, which has only recently entered the Virginia insurance marketplace.
According to the SGA manual, the Brookings Institution has calculated that PAYD insurance implemented nationally could reduce the number of vehicle miles traveled (VMT) by eight percent and save $50 billion to $60 billion a year by reducing the number of crashes and other driving-related externalities. Moreover, two-thirds of households would save an average of $270 per car per year, making insurance more affordable and decreasing the number of uninsured drivers on the road.
If the Brookings estimate of eight-percent VMT savings is anywhere near accurate, a shift to PAYD would be the closest thing to a free lunch imaginable. In Virginia, an eight percent reduction in traffic would translate into tens of billions of dollars in construction dollars that would not have to be spent. Add hundreds of millions of dollars yearly in reduced accident-related costs, and the policy is the closest thing to a public policy “no brainer” I can think of.
There are two predictable sources of resistance. One is the alliance of contractors, engineers and related vendors who make their livings building transportation infrastructure. Another is people who drive a lot more than average; they will miss their subsidies from low-mileage drivers. But arrayed against them is a politically potent group: Everyone else.
From the standpoint of conservative philosophical principles, PAYD is a two-fer. First, it is fiscally conservative, potentially saving billions of dollars in transportation spending and reducing pressure for tax increases. Second, it is non-coercive and market-based. No one would force insurance companies to provide PAYD, and no one would compel drivers to adopt PAYD policies.
What Virginia state government can and should do is encourage the spread of PAYD insurance. First, eliminate any laws that might interfere with the adoption of the PAYD rate structure. Even better, join other states in explicitly allowing insurance companies to offer the product.
SGA suggests that it also might be helpful to adopt a pilot project.
One of the biggest obstacles to widespread adoption of PAYD is a lack of knowledge on the part of insurance companies and state decision makers about how to structure it. A pilot program can be an effective way to test potential payment structures and data collection methods and reduce the start-up costs to insurance companies. It can also be a means to collect state-specific data about the benefits of PAYD, by monitoring changes in driver behavior. State transportation agencies can play an important leadership role and, in many cases, will be in the best position to administer such a program.
Privacy issues are minimal. Most new cars already record odometer data electronically onto internal computers, and millions of cars provide the data through GPS-tracking services like On Star. Progressive Insurance also installs an odometer-tracking device for subscribers. If people are wigged out by privacy concerns, they should be free to opt out of PAYD and subscribe to traditional insurance policies.
One last thought. Think of the powerful impact created by adopting a Mileage Based User Fee (MBUF) for funding road maintenance (as described here) in conjunction with PAYD. For a typical driver, PAYD premiums would amount to about 6.5 cents per mile. In Virginia, a mileage-based user fee could cover the state’s maintenance budget for about 2.6 cents per mile. Add it up, and that’s about 9.5 cents per mile. If people calculated that it cost them a dime for every mile they traveled, they would likely find ways to drive less.