California private auto was changed forever in 1988 with the passage of Proposition 103. Among other things the regulations provided that insurance companies must accept all good drivers (as defined by them) and rate auto on 3 primary factors: Driving Safety, Annual Mileage, and Years Driving (rather than age of driver).
Later some 40 other factors would be accepted onto a list of other permissible secondary factors, though insurance score is not one of them. Territories were abolished in factor of some statistically-built bands relating to accident frequency and other factors. Eventually, even the number and differentials between bands would be narrowed.
The effect of the original regulation and the subsequent changes was to cause or increase subsidies for a variety of policyholders:
- Drivers with accidents subsidize good drivers
- Long annual mileage drivers subsidize short annual mileage drivers
- Urban drivers subsidize rural drivers
- Nearly everyone subsidizes low experienced male drivers
The existence of these subsidies causes inequities in the marketplace and influences behavior that may not be desirable. For example, if drivers with accidents pay too much overall, this may cause an incentive to under report accidents. Less data is usually not good – the absence of accidents in the database will ultimately raise rates for the next lower level of accident-proneness, as the higher risk drivers seem to belong in the lower accident group based on their statistics.
Other effects of forced subsidies are the introduction of new companies that are specialists in the over-priced segment of the market, increases in the number of drivers in the residual market, and rate increases for truly good risks.
Pay-as-you-drive insurance:
It is the limited number of categories for annual miles driven that catches the attention of regulators and others wanting a more refined rating plan. Number of miles driven seems like a reasonable way to measure exposure and is easily understood by policyholders. Presumably in combination with “where you drive” (territory, that is. Though this isn’t “where you drive”, it’s “where you LIVE”), it would seem to cover a driver’s exposure pretty well (see next section for what research shows).
The new proposed regulation is being touted as a “green” provision, encouraging drivers to drive less by having their insurance coverage apply by mile driven. California Insurance Commissioner Steve Poizner has proposed this optional rating mechanism, allowing insurers to offer a voluntary option for consumers who are interested in pay-as-you-drive coverage.
Consumer groups are opposed, saying that there is not enough protections in the law for protecting the privacy of insured’s everyday activities. Some tracking mechanisms include “OnStar” satellite and GPS-based meters similar to those used in cell phones.
Quoting from the article:
“The Environmental Defense Fund estimates that if 30% of Californians participate in this voluntary coverage, California could avoid 55 million tons of CO2 between 2009 and 2020, which is the equivalent of taking 10 million cars off the road. This would save 5.5 billion gallons of gasoline and save Californians $40 billion dollars in car-related expenses. Additionally, the California Air Resources Board has recommended the adoption of pay as you drive as one of the means to meet future climate change gas reduction targets.”
Hard to ignore potential emissions reductions like these numbers.
b>But the research shows:
The research shows that pay-as-you-drive insurance may not get at the true exposure to auto insurance claims for each insured. For liability coverages, age/gender combination, along with insurance score and geography are the greatest claim level predictors. For property damage coverage, the model of the car takes over as the number on predictor (the others then follow). This information is from a research paper The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity, Michael Miller, FCAS and Richard Smith, FCAS, Epic Actuaries, June 2003.
Pros/Cons of Pay-As-You-Drive:
Pros:
- Exposure for insurance tied to miles driven – easy to understand by drivers
- The amount you pay for insurance would be directly controlled by the driver, rather than on factors such as sex, age, martial status, etc. that the driver has no control over.
- The current proposal is for an optional credit, giving low mileage drivers a choice.
- Reduced emissions
Cons:
- The amount a driver pays should be as closely tied to his/her exposure to loss as possible, to avoid cross-subsidies and comply with Actuarial Standards and Principles.
- Tracking mileage is difficult and some methods proposed inspire fear of lack of privacy in some consumers and consumer watchdog groups.
My opinion is that there are better, less complicated ways to refine the rating plan options when it come to annual mileage, and still emphasize lower emissions and “green” policies. One obvious one is to simply increase the number of mileage bands in the current plans and offer “green” discounts (and debits) based on the type of automobile covered. Discounts for Prius’s, debits for Hummers.
