Friday, July 31, 2009

California Pay-As-You-Drive Insurance A Wide Open Road

An amended regulation that could be in place by mid-November in California will allow companies to offer auto insurance based on how much mileage a driver puts on a car. The concept is in use in states like Texas and could be starting to gain ground nationally.

Industry representatives and a consumer advocate applaud the concept of making insurance more available and potentially more affordable. However, there was more disagreement over how complex the proposed regulation (Reg. 2008-00020) is and whether it will impede those twin goals advanced by California Insurance Commissioner Steven Poizner.

The California department says that the regulation will allow companies to sell auto insurance by the mile if they want by using a verified mileage program instead of mileage estimates, linking premiums to actual mileage. Consumers will be able to pre-pay for a specific number of miles and would have the option to purchase a block of miles at a specified price for a set period of time, according to the department. The concept works much like buying minutes on a pre-pay cell phone. If a consumer runs out of miles before the end of the policy period, more miles can be purchased.

A big piece of the program requires mileage verification through a variety of methods such as odometer readings taken by insurers, agents or vendors, auto repair dealers or smog check stations. A driver could also have a device placed in the vehicle to measure mileage although privacy concerns would prevent the gathering of data location through GPS devices.

While everyone interviewed by applauded the concept, there were varying opinions over the details.

The proposal creates “a pretty positive change with new avenues in competition,” according to Sam Sorich, president of the Association of California Insurance Companies, Sacramento. However, Sorich suggests that some revisions should be considered to make the proposed regulation simpler for both consumers and companies.

Among the changes ACIC is suggesting, Sorich says, are the proposed regulation creates prescribed bands of miles that all companies would follow. For instance, he explains, there may be a band that would cover up to 15,000 miles driven. Companies should be allowed to develop their own bands and establish rates it considers appropriate, he adds.

Additionally, he says that if a consumer agrees to use a tracking device in a car, GPS devices should be allowed and just measure straight mileage, he continues.
Another issue Sorich raises is what happens if a consumer runs out of miles before the end of a time period. Liability coverage would not run out but other components of auto coverage would and would have to be purchased again.

Sorich says he believes the measure will be put into place because the issue was first raised in October 2008, so action has to be taken by the end of this September or the process has to begin from scratch. He urged that “flexibility” be kept in mind as the amended regulation is put in place.

Dave Snyder, vice president and associate general counsel, public policy with the American Insurance Association, Washington, says that the regulation offers “flexibility and encouragement of innovation” in the auto insurance market. It is “a move in the right direction,” and takes account of that different companies have different systems that need to be an option under the regulation. “This is very much at the forefront of the effort to include mileage and vehicle usage” to determine auto insurance premiums, he notes.

Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, says that the concept is a good one but the regulation is too complex. In California, the number of miles driven is already a ratings factor, so it is not necessary to address that in the proposed regulation, he says. It would have been simpler to take the number of miles driven and divide them by premium, Birnbaum adds.

“We support the concept” but the proposed regulation “offers flexibility with one hand and takes it away with the other,” according to Rex Frazier, president, Personal Insurance Federation of California, Sacramento. For instance, he says that offering the same discount for different mileage verification does not recognize the multiple verification methods that companies use.

And, he adds, it does not allow the use of GPS systems because of privacy concerns over location data but such a requirement will minimize innovations. The issue should be looked at on a case-by-case basis, Frazier says.

Even if there are concerns about specific points in the proposed regulation, everyone interviewed by FiLife reiterated their optimism about the future of the concept of pay-as-you-go auto insurance and believe that the idea is going to continue to gain traction as companies look to match cost to risk and consumers look to pare their budgets.

This article first appeared on

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