How ‘Pay As You Go’ Auto Insurance Plans Work

Several of the largest auto insurance providers now allow customers to lower their insurance rates based on how they drive. Called “pay as you go” car insurance plans, the policies are underwritten the same way conventional plans are done but provide people with the chance to reduce their rates by up to 30 percent based on how, when and where they drive.

The new option became available recently and is based on auto insurance options first provided by some car insurers in California. Enabling motorists to reduce their auto insurance costs by traveling less encourages them to leave vehicles at home as much as possible and reduce the possibility of accidents.

In California, pay-as-you-drive insurance plans allow insurers to record actual vehicle mileage and give discounts for driving less, and Massachusetts and New York City insurance officials support similar measures in the respective locales to help lower rates as well as provide environmental benefits. Encouraging motorists to drive less, use car pools and take public transportation by reducing their auto insurance costs for driving less can help reduce traffic congestion as well as pollution, according to Massachusetts officials.

A potential pay-as-you-drive insurance plan has been included in the commonwealth’s “Clean Energy and Climate Plan for 2020,” which estimates Massachusetts motorists would drive up to 10 percent less than with regular auto insurance coverage. Of course, when people drive less, there also are fewer accidents, and a 2005 study conducted by the Brookings Institution indicates people who drive about 5,000 miles per year were involved in half the number of insurance claims as those who drove 30,000 miles per year.

California’s Office of Administrative Law in 2009 approved the nation’s first regulations for the insurance products, which were proposed by the state’s former insurance commissioner, Steve Poizner, who says the state’s residents will be encouraged to drive fewer miles and save money by not paying for insurance while their vehicles are parked. But pay-as-you-drive plans have many benefits beyond just saving money for motorists.

Pay as you go is an innovative way to give California motorists financial rewards for driving less, leading to lower-cost auto insurance, less air pollution and a reduced dependence on foreign oil, according to state officials.

California motorists choosing a pay-as-you-go auto insurance policy have options regarding how the number of miles driven is tracked. Insurers could simply go by the odometer, allow customers to report their miles driven or by using a device to track actual miles driven, according to state officials. But state regulations do not allow insurers to use a “technological device” to monitor where people drive.

In most cases, insurers obtain permission to electronically monitor vehicle usage by either downloading information for the vehicle’s electronic control unit or by monitoring programs like OnStar. Based on results, motorists can save up to 30 percent on their insurance rates but never will have their rates increase based on results. About a 15 percent rate reduction is the norm so far.

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