[sustran] Pay-As-You-Drive Pricing For Insurance Affordability -
Media Notice
Todd Alexander Litman
litman at vtpi.org
Wed May 19 23:38:03 JST 2004
PAY-AS-YOU-DRIVE PRICING:
Innovative Strategy Proposed To Increase Insurance Affordability And
Reduce Uninsured Driving
Media Notice
For Immediate Release
17 May 2004
For information Contact Todd Litman
Phone: 250-360-1560
Email: litman at vtpi.org
In a paper presented this week at a national meeting of the Casualty
Actuarial Society (the professional organization for insurance risk
analysts), researcher Todd Litman of the Victoria Transport Policy
Institute describes a new strategy to increase vehicle insurance
affordability and reduce uninsured driving called Pay-As-You-Drive Pricing.
Pay-As-You-Drive (PAYD) pricing means that a vehicles insurance premiums
are based directly on how much it is driven. Premiums are calculated by the
vehicle-mile, so a low-risk driver pays 2-4¢ per mile and a high-risk
driver pays 10-20¢ per mile. This lets motorists save money by reducing
their mileage. PAYD can be a consumer option, so motorists select the rate
structure that offers them the best value.
U.S. households spend approximately $1,000 per year on average on vehicle
insurance. Vehicle insurance can be major financial burden for lower-income
households, forcing many to forego vehicle ownership or drive uninsured.
Various studies indicate that 10-35% of vehicles are uninsured, and this
increases to more than 50% in some lower-income communities.
According to Litman, Pay-As-You-Drive offers a new way to provide
affordable insurance and reduce uninsured driving. Currently, insurance
affordability means that even high-risk, lower-income motorists can afford
unlimited-mileage coverage. To achieve this, insurance companies are forced
to overcharge lower-risk drivers compared with their claim costs. PAYD
redefines insurance affordability to mean that higher-risk drivers must
limit their mileage to the accident exposure level they can afford. It
actually reduces crashes and insurance claims rather than just shifting
costs, and eliminates the need for unfair cross-subsidies between risk
classes.
Litman describes how PAYD can help lower-income workers. Consider the
situation of a worker who loses his or her job, and because they no longer
commute, drives fewer miles. With current pricing, they continue paying the
same vehicle insurance premiums, although both their income and their
chance of having an insurance claim decline. People who are unemployed
often find insurance costs a major financial burden, and so face the
prospect of driving uninsured or giving up their car and the employment
opportunities it provides. With PAYD, unemployed workers pay lower premiums
and so can afford to keep a car for essential trips, job searches and
future employment.
Pay-As-You-Drive pricing offers a number of additional benefits. By
providing an incentive to reduce annual mileage it reduces accidents,
traffic congestion, energy consumption and pollution emissions. It is
currently being promoted by a variety of transportation, social equity and
environmental organizations.
Some major insurance companies have implemented PAYD pilot projects,
including GMAC (General Motors Acceptance Corporation) Insurance,
Progressive Insurance and Norwich Union. However, these programs require
installation of special equipment in each vehicle, which increases costs.
According to Litman, Insurance will only become more affordable when
insurance companies offer the simpler, odometer-based system recommended in
my paper.
The full report, Pay-As-You-Drive Pricing For Insurance Affordability, is
available at the Victoria Transport Policy Institute website at
http://www.vtpi.org/payd_aff.pdf.
Sincerely,
Todd Litman, Director
Victoria Transport Policy Institute
"Efficiency - Equity - Clarity"
1250 Rudlin Street
Victoria, BC, V8V 3R7, Canada
Phone & Fax: 250-360-1560
Email: litman at vtpi.org
Website: http://www.vtpi.org
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