Pay-as-you-drive auto insurance gets revved up

Jill Overmyer

Pay-as-you-drive auto insurance offers an alternative to traditional monthly premium-based auto insurance by allowing drivers to pay for coverage based on the number of miles they drive.While pay-as-you-drive programs have been available in the United States since 1998, it didn’t start becoming widespread until nearly a decade later. According to a study by environmental advocacy group Ceres, more than two dozen auto insurance companies offered pay-as-you-drive programs to their customers as of 2009, including Progressive, GMAC and Farmers.

In December, California’s insurance commissioner approved pay-as-you-drive insurance in the state. Insurers will begin offering it there in February 2011.

How does pay-as-you-drive insurance work?

Although each auto insurance company carries out pay-as-you-drive programs in its own way, the general idea is the same: the less you drive your car, the less you pay for auto insurance.

State Farm, which plans to launch its pay-as-you-drive program in California in 2011, will offer 5 percent discounts to drivers who report their odometer readings or have a GPS system installed in their cars. State Farm’s program, called Drive Safe and Save, already is available in Ohio. Progressive’s pay-as-you-drive program is similar; a wireless device installed a car tracks the number of miles driven, and drivers pay per mile. Other companies allow drivers to buy miles ahead of time.

What are the benefits of pay-as-you-drive auto insurance?

Pay-as-you-drive insurance offers many benefits, including:

• Savings. Many drivers are lured to pay-as-you-drive programs by the potential savings. A report by the Brookings Institution found that many drivers in the United States would save an average of $270 per car on their insurance premiums by using a pay-as-you-drive program.
• Environmental responsibility. Pay-as-you-drive programs encourage drivers to be more aware of their mileage; as a result, drivers reduce their miles driven by 10 percent to 15 percent, as reported in the Ceres study. This means fewer cars on the road and fewer harmful emissions and pollutants from vehicles. For insurance companies, it means a lower risk for accidents.

Is pay-as-you-drive right for me?

Pay-as-you-drive programs can offer large savings. Consider pay-as-you-drive programs if any of the following applies to you:

• You carpool or take public transportation to work. You could see substantial savings in your insurance from a pay-as-you-drive program because you drive fewer miles than the average commuter.

Your driving is limited already. If you don’t drive long distances often, or if your driving is limited to quick trips to the store or errands around town, you pose less of a risk to auto insurance companies than a driver who spends more time on the road. A pay-as-you-drive plan probably would offer substantial savings.