West Virginia Highlands Voice

by Ted Boettner

One of the world’s largest concerns is reducing greenhouse gases that cause global warming. And one of the biggest concerns for Americans, for both domestic and foreign reasons, is reducing our dependency on oil. One way West Virginia could move forward on these two important goals would be to implement a simple reform in auto insurance called Pay-As-You-Drive (PAYD).

Currently, auto insurance is only loosely linked to the amount of driving a person does. PAYD is a market-based approach that gives consumers the option to pay for insurance by the mile, instead of purchasing it at a fixed premium. At present, if an individual drives the average of 13,500 miles per year, instead of 30,000, then her insurance rate is reduced only slightly, usually by 15% or less according experts. This means that she is subsidizing the person who is driving almost three times as much, all things being equal. The key difference with PAYD is that insurance premiums would be linked to miles driven, instead of the current scheme of an all-you-can-eat buffet where low mileage drivers subsidize those who drive more. PAYD would make drivers more aware of the true costs of vehicle operation and give them an economic incentive to drive less.

Aaron Edlin, a professor of economics and law at the University of California, Berkeley, estimates that PAYD insurance could reduce driving and gasoline consumption by 10-15%. Automobiles account for more than 25% of greenhouse gas emissions in the United States. The U.S. Department of Transportation estimates the health effects of air pollution from motor vehicles costs $40 to $65 billion annually. Considering these figures, the benefits of a PAYD insurance option could be dramatic.

The benefits from switching to a pay-as-you go system would also make insurance more affordable for low-income drivers and reduce accidents. According to a recent Insurance Research Commission study, 15 percent of West Virginia drivers were uninsured in 2004. This may be because low-income residents cannot afford insurance and others just may not consider it cost-effective to insure a seldom-used vehicle. PAYD would encourage insurance in these cases, reducing the number of uninsured motorists on the road. And PAYD would also prevent inflated premiums for lower-income drivers, who generally tend to drive less than average. Finally, PAYD would be ideal for retirees, stay-at-home moms, and younger drivers.

Auto accidents and deaths would decline, too. Researches have estimated that PAYD could reduce overall driving 10-20%. According to a study conducted by the Victoria Transport Policy Institute, a 10% reduction in driving is expected to reduce crashes by 17%. Higher-risk motorists would have the greatest incentive to reduce their driving, making the roads a safer place for all drivers.

Over the past few years, Texas, Oregon, Minnesota, and California have started promoting PAYD insurance as an option for consumers. The state of Oregon offers a $200 per year tax credit for each PAYD insurance policy and West Virginia could do the same. In Minnesota, Progressive Auto Insurance has been offering PAYD option to its customers.

While PAYD insurance would have the greatest impact if it were implemented nationally, West Virginia could take action today. According to a recent survey by the Georgia Tech, West Virginia is one of 27 states that do not prohibit PAYD auto insurance. However, because state regulations require that drivers be insured at all times, and PAYD might mean that drivers would lose coverage if they exceeded the prepaid number of miles, an insurer could structure a PAYD program to ensure that participating drivers are never uninsured.

If insurance companies in West Virginia adopted PAYD, recognized risk factors, such as location, age, gender, driving record and vehicle characteristics would still affect the per-mile price. A driver with a history of accidents would still pay more than a driver with a good record, all else being equal. To capture mileage, an annual reading could be done at a service center, by the insurance agent, or at garages licensed to do state inspections.

The individual insurance companies would incur some one-time costs by changing their billing policies. But after they switched the expected increase in insured drivers would likely makeup the difference. To help with start-up costs, WV could offer a $200 annual tax credit to insurance companies that offer PAYD.

While PAYD insurance could lower the cost of driving for most people (because most consumers drive less than the average), it would not be painless for everyone. If you drive more than the average, you will have to pay more. This is fair because you are more likely on average to cause an accident, burden the environment, and deepen US dependence on foreign oil. Opposition to PAYD would also be expected from come from oil companies, gas stations owners and the highway construction and insurance industries.

Despite these hurdles, insurance companies that offer an optional PAYD policy could not only help curb global warming and reduce our dependence on foreign oil, but give West Virginia drivers more control over their insurance costs.

Boettner is a research and policy analyst at Mountain State Education & Research Foundation.