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Pay-As-You-Drive Pricing For Insurance Affordability - Media Notice

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  • Todd Alexander Litman
    PAY-AS-YOU-DRIVE PRICING: Innovative Strategy Proposed To Increase Insurance Affordability And Reduce Uninsured Driving Media Notice For Immediate Release 17
    Message 1 of 1 , May 19, 2004
      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@...

      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 vehicle’s 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

      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

      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@...
      Website: http://www.vtpi.org
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