How does car mileage affect your car insurance?

Kathryn Hawkins

Part of your car insurance premium is tied to the amount of driving you do, but your car insurance company may not be calculating your mileage correctly.

“With traditional policies, drivers are generally asked by their insurer to estimate the number of miles they drive each year,” says Loretta Worters, a spokeswoman for the nonprofit Insurance Information Institute. “However, many underestimate mileage and some may overestimate it.”

Doug Nadeau, a spokesman for State Farm, says: “A vehicle’s annual mileage is an important factor in determining the overall risk presented, and thus the premium a policyholder will pay for an auto insurance policy.”

So, how does your annual mileage affect your insurance premiums, and what can you do to make sure you’re not being overcharged?

How you’re rated

Some insurers have just two mileage rating categories: drivers who rack up fewer than 7,500 miles a year and drivers who rack up more than that. Others rely on three or more mileage groupings to determine premiums.

“On average, drivers who log less than about 7,500 miles a year may be eligible for ‘low mileage’ programs that reduce premiums an average of about 10 to 15 percent,” Worters says.

While rates vary based on other factors, including the policyholder’s location, age and driving history, “a good rule of thumb is that the less you drive, the lower your premium will be,” Nadeau says.

With all insurers, policyholders who are rated as high-mileage drivers pay more for their insurance, in conjunction with the greater likelihood of filing claims. A study by Quality Planning, which supplies software and services to car insurance companies, found that people who drove less than 3,000 miles a year filed 40 percent fewer claims than average, while those who drove more than 28,000 miles a year filed 28 percent more claims than average.

Not always accurate

However, insurance rating based on estimated mileage often suffers from a lack of accuracy.

Consumers may neglect to tell their insurers if they’ve begun telecommuting more frequently or gotten a job closer to home — mileage-reducing acts that could cut their premiums.

On the other hand, insurers often get short shrift. Quality Planning found that car insurers missed out on nearly $16 billion in revenue due to incorrect policyholder information in 2010, largely due to consumers’ tendency to underestimate the miles they would drive.

Usage-based systems

Given how substantially mileage miscalculations are cutting into insurance company profits, many insurers are seeking different ways to track your mileage.

Usage-based insurance, or telematics, is gaining popularity. Car insurers can install meters in policyholders’ cars to track mileage and driving behavior.

Such programs can monitor drivers’ behavior on the road and may encourage them to drive more carefully.

“The insurers charge drivers according to when, how, and how many miles they drive, so that those who log fewer miles pay less,” Worters says. “The more positively they react to the incentive, the less they pay for their auto insurance.”

For instance, Progressive offers a use-based policy known as Snapshot; drivers install telematics devices in their cars to monitor their mileage. Drivers can receive discounts of anywhere up to 30 percent and won't be subject to extra charges if their mileage goes above estimated calculations.

State Farm also has gotten in on the act with its Drive Safe & Save program, which can offer discounts of up to 50 percent, based on mileage as well as driving habits such as obeying the speed limit and avoiding sudden stops. The program is available in 14 states.

“Drive Safe & Save allows State Farm to more precisely measure the cost of insuring autos so that each customer pays a premium that is more in line with the risk that customer is passing along to State Farm,” Nadeau says.

Predictive analytics

Predictive analytics programs, which build mileage estimates based on each policyholder’s characteristics such as vehicle type and household demographics, also can help develop a clearer picture of a driver’s mileage.

Verisk Insurance Solutions, owner of Quality Planning, has unveiled the QPC Mileage Calculator, which provides mileage estimates based on statistical modeling for risk based on existing mileage data. The new tool likely will be licensed by insurance companies to help them get a more accurate read on customer mileage predictions. Customers who fit the data trends for low-mileage, low-risk drivers are likely to receive better rates on their premiums, while customers who’ve traditionally had their mileage underestimated may pay slightly higher rates.

“Policyholder self-reported estimates are all too often incorrect,” Raj Bhat, president of Quality Planning, says in a news release. “The QPC Mileage Calculator streamlines the quote process and greatly increases accuracy. It‘s so much more effective to ask consumers to validate a modeled mileage estimate versus responding to an open-ended question.”

Making the switch

If you think you’re being charged based on a mileage rate that’s higher than your actual average, you may save some money by switching to another insurer.

If you’re happy with your existing insurance company, ask whether low-mileage discounts are available and which mileage categories are used to rate policyholders. If you’re not eligible for a low-mileage discount, find out whether a usage-based plan is available in your state. In addition to State Farm and Progressive, Allstate, Nationwide and Travelers are among the car insurers that provide telematics-based plans.

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