Pay-as-you-drive (or PAYD) car insurance sets rates based on the individual’s amount of driving, type of vehicle, and other measures. Also known as mileage-based or usage-based insurance, PAYD is praised for its potential to reduce automobile emissions, increase highway safety, and reward safe and low-mileage drivers.
PAYD car insurance rates also may take into account the person’s residential location, speed, driving style, or other factors. For example, the average cost per mile for rural drivers would be lower than for urban drivers. Offered to consumers on a voluntary basis, PAYD is available in several countries and, since 2004, has been sold in more than 30 states.
The factors that determine PAYD car insurance rates are measured by the odometer, GPS, or another telematic device installed in the car. Insurers and state laws can also allow mileage to be measured at smog check stations or auto repair shops.
While traditional car insurance may reward safe drivers with lower premiums or bonuses, pay-as-you-drive programs offer even more benefits to low-mileage, safe drivers. It makes buying car insurance similar to buying gasoline – you only pay for what you need and what you use.
Benefits for Drivers • Lowers car insurance rates for safe, careful drivers who drive a limited number of miles • Rewards people for limiting their driving by using public transportation and carpooling • Encourages high-risk drivers to improve their habits • Provides increased security for drivers through GPS or telematic devices, only if the driver allows the car insurance company to track locations • Offers consumers more choices of car insurance plans • Makes car insurance more affordable for younger drivers with safe records • Offsets fuel costs during periods of high gasoline prices • Safeguards drivers’ privacy by offering options that prevent disclosure of the consumer’s location and driving behavior data to anyone outside the car insurance company
Benefits for Society • Can reduce pollution by lowering the amount of driving nationwide (an estimated 5 to 15 percent) • Decreases the number of accidents and highway deaths and injuries • Cuts the amount of fuel used by discouraging inefficient and unnecessary driving • Encourages use of more fuel-efficient vehicles • Reduces traffic congestion • Lowers fuel consumption, thus lessening U.S. dependence on foreign oil • Saves taxpayers money on roadwork
Benefits for Insurers • Improves insurance company efficiency by aligning car insurance rates with actual risk • Means a greater choice of products to offer consumers, including policies for shorter time periods • Allows flexibility in developing premiums • May result in increased market share and reputation as a customer-oriented and socially responsible company • Produces fewer claims to pay out by reducing the number of accidents