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Pay-as-you-drive time

California motorists and insurers would benefit from a plan to base auto rates on mileage.

August 29, 2008

State Insurance Commissioner Steve Poizner this week announced such a simple, brilliant, universally beneficial plan that it's astounding no one ever thought of it before: allowing drivers to buy auto insurance policies with annual premiums based on the number of miles they drive.

Oh, wait. Somebody did think of it before. In fact, economists have been urging states to enable pay-as-you-drive insurance policies for decades because they could save billions of dollars, reduce traffic congestion and accidents, slash pollution, cut gasoline use and fight global warming. That it has taken this long for such a policy to be seriously considered in California is a tribute to the power of insurance companies, which have resisted on the theory that anything good for consumers is bad for profits.

Poizner's scheme, if it's enacted next year, would give drivers the option of buying policies under which the number of miles they drive would be directly monitored by insurers -- either through odometer checks by a company representative, the submission of maintenance records or an electronic device that transmits odometer readings. This would give insurers much more accurate information about miles driven, a prime risk factor, and spur them to charge lower premiums to conservative drivers. According to an analysis by the Brookings Institution, nearly two-thirds of California households would have lower rates under this system, with the average savings coming to $276 a year.

Even more impressive are the social benefits. Providing a financial incentive for people to drive less would encourage them to live closer to their workplaces or to take public transit. If everyone in California made the switch, Brookings found, it would save 1.2 billion gallons of gasoline a year, reduce costs for such ills as traffic and pollution by $10.8 billion a year and cut the state's greenhouse gas emissions by about 2%. These numbers are a bit deceiving because not everybody would switch policies, but even if only the two-thirds who would get lower rates did, the savings would still be enormous.

The combination of high gas prices and the state's new regulatory campaign against climate change have finally led to a breakthrough on pay-as-you-drive policies, which even big insurers suddenly seem to be getting behind. It's by no means clear that the new policies would be money-losers for them, because more accurate tracking and less driving by their customers should help them reduce accident claims. Thus Poizner's proposal could be one of those remarkably rare public policy shifts in which everybody comes out a winner. He should move to implement it as quickly as possible.

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