The current lump-sum pricing of auto insurance is inefficient and inequitable. Drivers who are similar in other respects—age, gender, location, driving safety record—pay nearly the same premiums if they drive five thousand or fifty thousand miles a year. Just as an all-you-can-eat restaurant encourages more eating, all-you-can-drive insurance pricing encourages more driving. That means more accidents, congestion, carbon emissions, local pollution, and dependence on oil. This pricing system is inequitable because low-mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average.
A better approach is simple and obvious: pay-as-you-drive (PAYD) auto insurance. With PAYD, insurance premiums would be priced per mile driven. All other risk factors will still be taken into account, so a high-risk driver would pay a greater per-mile premium than a low-risk driver. With insurance costs that vary with miles driven, people would be able to save money by reducing their driving, and this incentive would lead to fewer driving-related harms. PAYD would also be more equitable because it would eliminate the cross-subsidization of insurance costs from low-mileage to high-mileage drivers.
Given these potential benefits, there has been increased interest in California recently in encouraging PAYD insurance. This paper is intended to help policymakers and the general public understand and evaluate the potential impact of PAYD in California. It is based on a recently-released study of PAYD in the United States, “Pay-As-You-Drive Auto Insurance: A Simple Way to Reduce Driving Related Harms and Increase Equity,” published by the Hamilton Project at the Brookings Institution.
In California, we find that:
- PAYD would result in an 8 percent driving reduction from light-duty vehicles.
- Estimated gross annual social benefits from an 8 percent driving reduction total $10.8 billion based on current driving levels, and $21.1 billion based on 2020 projections.
- The California state government would save $54 million annually based on 2006 data and $60 million annually based on 2020 projections.
- PAYD would generate 7 to 9 percent of the total CO2 reductions needed to meet California’s emissions targets for 2020.
- Nearly two-thirds (64 percent) of households in California would have lower premiums under PAYD. The average savings for that group would be $276 per vehicle per year (in 2007 dollars).
- Low-income drivers would benefit especially. Every household income group making less than $47,500 (in 2001) saves on average. Even in higher income groups, a majority of households are better off.
- For every ethnicity, a majority of California households would save money with PAYD, contrary to the claims of some groups that PAYD would disproportionately impact certain ethnic groups.
- Because geography is a key risk-factor, a roughly equal proportion of rural (62.4 percent) and urban (64.2 percent) California households save money with PAYD.
In short, PAYD represents a win-win policy. What is good for drivers, in this case, is also good for society.