Pay-As-You-Drive Insurance

Abstract

Vehicle-miles traveled (VMT) can greatly affect crash risk and, therefore, insurance costs, but accurately assessing VMT has been challenging for insurance agencies. Affordable technology now allows insurance companies to track VMT better and has prompted pilot programs and further research of mileage-based, or pay-as-you-drive (PAYD), insurance. Research shows that PAYD programs can discourage extraneous driving and thereby save drivers money (but reduce consumer welfare by less than consumer cost savings) and reduce crash risks, insurers’ costs, and externalities. Studies consider aggregate, national, and statewide effects of PAYD policies, with some focus on equity effects, but much heterogeneity is ignored. This study bolsters existing work by predicting PAYD effects with the use of National Household Travel Survey (NHTS) data. These data are used to model driver response to driving cost changes and an insurance pricing model (per vehicle) according to actual loss data and risk factors by vehicle type. This study anticipates PAYD impact variations across a sample of NHTS households and vehicle types and finds that on average households save enough on reduced insurance and travel costs to cover lost welfare from VMT reductions. Results suggest that the average (light-duty) vehicle will be driven 2.7% less (237 fewer annual miles per year), with average consumer benefits of only $2.00 per vehicle with a premium that is partially fixed and partially mileage based. Drivers with the lowest annual VMT needs are expected to receive the largest welfare benefits, thanks to a convex relationship between VMT and crash losses. This analysis provides support to existing literature that PAYD policies can reduce VMT and insurance pricing equity without harming driver welfare.