New car insurance option coming for Californians

By Jim Sloan on July 30th, 2010

Auto Insurance

California drivers will soon be able to save money on their car insurance rates with the new pay-as-you-drive rate plan proposed by State Farm Mutual Automobile Insurance Company.

California Insurance Commissioner Steve Poizner changed the state's regulations to allow pay-as-you-drive (PAYD) rate plans, and State Farm officials expect Poizner to allow their new policy to be sold as soon as September 2010. State Farm also will continue to sell traditional policies in California.

"Pay as you drive is another option for drivers, and it helps us better match price to risk," State Farm spokesman Bob Devereux said. "It's a program we think our customers will find innovative."

How companies keep track

PAYD auto insurance policies offer discounts to drivers who reduce the amount of miles they drive in a year. Several states already allow PAYD auto insurance policies, and many allow companies to track mileage, as well as other driving habits like hard braking and the time of day when driving takes place, to determine how much a driver should pay for insurance.

Most PAYD programs utilize a data logging device that is inserted into an onboard diagnostic port and automatically reports driving data to the insurance company. State Farm will allow its California customers who opt for a PAYD policy to self-report odometer readings--unless the customer is driving a GM vehicle equipped with the OnStar telematics system that can report the data for them.

Progressive Universal Insurance Company, a leader in the PAYD field, is still evaluating whether it may offer its MyRate program in California. The MyRate program, which establishes premiums based on mileage, as well as driving behavior, is currently offered in 19 states. But because California will restrict driving data collection to mileage only, Progressive isn't sure its PAYD program will work in the Golden State.

"We think our method gives us a very effective and accurate way to track not only how many miles a person drives but also how safely those miles were driven," said Richard Hutchinson, general manager of Progressive's usage-based insurance division. "Our experience has shown that the number of miles a person drives is mildly predictive of a person's risk of being involved in an accident, but mileage plus driving behavior is even more so," added Hutchinson, "we're still evaluating how MyRate could work in California."

How State Farm's policy would work

State Farm's "Drive Safe and Save" rating program establishes auto insurance rates based on actual mileage driven rather than estimated mileage.

After signing up for the program, drivers who don't have OnStar, which comes exclusively on GM vehicles, report odometer readings online every six months when policies are renewed. After a year, the driver's rates will be adjusted if their mileage was low enough. According to the state, consumers who cut their driving by as little as 500 miles a year can earn reduced rates.

Although State Farm will allow drivers to self-report, the new California regulations allow companies offering PAYD policies to:

  • Check the odometer themselves
  • Hire vendors, such as smog check technicians, to check it
  • Deploy an automatic recording device on the vehicle

Poizner proposed PAYD regulations for California in 2008 and his proposed regulations were approved a year later. Poizner said PAYD policies would reduce congestion, pollution, emissions, oil consumption and the cost of driving. The new regulations don't prohibit companies from continuing to offer traditional auto insurance policies based on estimated mileage and other factors.

Molly DeFrank, a spokesperson for the California Department of Insurance, said state law allows consumer groups to comment on applications like State Farm's and that final approval depends on how many groups choose to "intervene." She emphasized that car insurance companies are required to use just three factors in setting rates: driving record, years of experience and miles driven annually.

"Tracking the location of drivers does not have a place in pay-as-you-drive auto insurance for privacy and public policy reasons," she said.

Effect in other states

In other states that have already adopted regulations allowing PAYD auto insurance policies, some customers have reaped big savings. In Oregon, for example, National General Assurance Company offers discounts ranging from 50 percent if you drive less than 2,500 miles a year to 5 percent for driving 12,000 to 15,000 miles. Progressive gives a base discount when you sign up and discounts of 5 percent to 25 percent based on when you drive, your driving habits and your mileage.

But according to a 2008 Brookings Institute study, lower auto insurance premiums are just the beginning of the savings drivers and state and federal governments can reap from a PAYD system. If all motorists in the U.S. had PAYD auto insurance, Brookings researchers estimated that driving would decline by 8 percent, carbon emissions would decline by 2 percent and oil consumption would decline by about 4 percent. About two-thirds of all households would pay less for auto insurance, for a savings of $270 per car annually, and society as a whole would save $50 billion to $60 billion it currently loses in "driving-related harms."

According to Poizner, studies have shown that if 30 percent of Californians participate in PAYD coverage, by 2020 the state would:

  • Reduce carbon dioxide emissions by 55 million tons
  • Take the equivalent of 10 million cars off the road
  • Reduce gasoline consumption by 5.5 billion gallons
  • Save Californians $40 billion in car-related expenses

But State Farm's Devereux said it's still "too early to tell" how many California customers will switch to his company's "Drive Safe and Save" PAYD program. Customers will still be able to return to a traditional auto insurance policy if they prefer, but he thinks many customers will take advantage of the chance to save money--even if it means driving less.

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