Posts about PAYD Insurance

Roads

"All you can eat" driving promotes vehicular gluttony

by Michael Perkins   •   February 27, 2009 11:02 am

Yesterday, we discussed how "all you can eat" pricing can incentivize transit ridership. What about driving?

Traditionally, cars' pricing is almost purely unlimited use. You buy the car up front, or have a fixed monthly loan or lease payment. You pay registration, property taxes, inspections, and insurance regardless of how much you use the car. Parking is usually free, whether you are a tenant, employee or customer. Your only costs per trip are gas and maintenance, and those you don't even pay at the time you take the trip, but later, when your gas tank is empty or your tires are worn. There's a good summary of the per-mile costs of driving here. Insurance, registration, residential parking and car purchase costs about 50¢ per mile, and gas, maintenance, and tires cost about 14¢ per mile.

When you hop in the car, it's easy to not even think about these costs. Psychologically, once you own a car, keep the gas tank filled and maintain it properly, additional trips are "free". The psychological incentives today promote driving and discourage transit. If we want to rectify that balance, because of externalities like pollution or congestion, safety and noise, then we should move toward more pay-per-use systems for cars.

Charge tolls to drive on roads. Charge per use for parking. Daily or hourly parking charges are better for this purpose than monthly contracts. With a monthly contract, parking is already paid for on day one, so all additional days are "free". Other methods are less common: insurance can be priced per mile. Shared-car services like Zipcar charge by the hour. Taxicabs charge per trip and mile.

It's possible to make some of these changes without changing the overall costs, so it's not even necessary to get into a cars vs. transit debate. If someone pays $1,000 per year in insurance and drives about 12,000 miles per year, it doesn't cost them more if you charge $200 plus 6.6 cents per mile. It would encourage people to drive fewer miles, however (for comparison, gasoline including taxes is currently about 8 cents per mile). Also, if apartments typically rent for $1500 a month and include two parking spaces free, it's not an increase if the rent drops to $1300 per month and you pay $100 more per month for a parking space. Parking at work, which used to be unlimited at $120 per month, could be $6 per day against a pre-paid account instead of an unlimited per month charge.

If you change the way people pay for transit and cars, you can still fund both, but align the incentives so that they aren't pushing people to choose driving over transit. Because driving involves pollution, congestion, safety risks, and inefficient land use patterns, ending our structural economic bias toward driving would help society as a whole. Meanwhile, because increased transit use reduces the bad effects of driving, and increases the political will to run more frequent vehicles and expand the network, it's good for society to lower the barriers to transit use.

Roads

Pay-as-you-drive or pay-as-you-drive-safely?

by David Alpert   •   September 3, 2008 5:07 pm

Pay-as-you-drive auto insurance is an important tool to unbundle the costs of driving. Today, car insurance premiums depend on the driver's record and amount of experience, but have almost nothing to do with whether the policyholder drives one thousand miles a year or one hundred thousand miles a year. The more you drive, the better deal you get on your insurance. That's unfair to those who drive less, and creates a backward economic incentive.

California's state insurance commissioner took steps last week to legalize this type of insurance. The Brookings Institution, which has published research showing the benfits of PAYD, concluded that two-thirds of California households would save money, especially low-income drivers but including drivers in all income groups, ethnicities, and rural and urban households. Overall, implementing PAYD would cut auto use 8 percent, Brookings projects, cutting pollution, saving money on health-care and disability payments, reducing accidents and cutting congestion.

Progressive already offers a program, MyRate, in Maryland, New Jersey, Alabama, Minnesota, and Oregon. Unlike California's proposal, MyRate not only considers total mileage, but also driving speeds, aggressive driving, and time of day, by using a special electronic device that plugs in to the car. This is the sort of plan loved by economists and loathed by privacy advocates, who successfully lobbied California to prohibit GPS tracking in PAYD programs.

Whether the plans use a GPS or just an odometer reading, they'll be most effective when drivers perceive a direct connection between their behavior and their insurance costs. Progressive's program shows drivers how they're doing online, with graphs of driving behavior, comparisons to the average MyRate driver, and up-to-date information about their discounts.

As we've learned from experiences like the ambient orb for power consumption, the more feedback people get and the closer it is to real-time, the bigger the effect on behavior. Ideally, Progressive's device could flash some statistics while the driver is on the road, just as the Prius's onboard display shows owners their real-time gas mileage and helps train them to conserve as much as possible.

An odometer system wouldn't do any of this, of course, but insurers could tell drivers a simple cost per mile, or suggest thinking about it in terms of an average added insurance cost per gallon of gas, or even provide an online calculator so they can compute the incremental insurance cost (and gas cost) of a long car trip.

Even a small reduction in VMT is significantly reducing auto fatalities. PAYD insurance will help reduce VMT further, while eliminating the unfair pricing structure that penalizes those who don't commute by car or commute only short distances. Let's bring it to DC and Virginia!

Roads

Rewarding urban living in mortgages and insurance

by David Alpert   •   April 22, 2008 12:44 pm

For over 50 years, the U.S. economy has shaped itself around suburban development and car-centric life. From mortgages to insurance, companies assumed that the standard household occupied a detached single-family home and drove to work. This built-in bias meant that even as Americans, from young singles to empty nesters, started to crave walkable cities once more, the economic deck was stacked against city life, keeping the middle class largely out of the cities.

Now, the market is responding to the recent demand by creating products tailored for urban living. Pay-as-you-drive insurance and location-efficient mortgages both give people credit for the driving they don't do and shouldn't have to pay for.

Progressive Auto Insurance is being, well, progressive by offering the nation's first pay-as-you-drive policy.

Drivers who sign up for MyRate will install a small wireless device in their cars that transmits to Progressive not just how many miles they drive but also when those miles are driven and, to some extent, how they are driven: the device measures the car’s speed every second, from which Progressive can derive acceleration and braking behavior. Which means that Progressive will not only be able to charge drivers for the actual miles they consume but will also better assess the true risk of each driver.

According to Freakonomics authors Levitt and Dubner, between pollution, congestion, and damage from auto collisions create negative externalities to society of $300 million a year—each time someone drives a mile, society pays an average of ten cents beyond what the driver is contributing back in gas taxes or tolls.

People who commute by transit, foot, bike, rollerblade, scooter, or carpool save a lot of money in transportation costs (and more with PAYD insurance). Why not account for that in determining mortgage qualification? Lower expenses mean someone can reasonably afford a higher mortgage. That's the idea behind the Location-Efficient Mortgage, which are available so far in Chicago, Seattle, Los Angeles, and the SF Bay Area to home buyers who purchase homes in efficient locations.

It takes time for the economy to shift to accommodate new consumer demand, but it does. And the consumer demand is there for more walkable, transit-oriented urban neighborhoods. Not everyone wants to live in a townhouse with a corner grocery nearby, but more people do than can find safe, affordable townhouses. As long as cities allow more to be built, insurers and mortgage lenders will adapt.

Roads

Pay-as-you-drive insurance

by David Alpert   •   February 29, 2008 4:40 pm

One obstacle to transit ridership is that cars are mostly a sunk cost. Once you've already paid for the car or car loan, registration, insurance, maintenance, etc., the incremental cost of driving the car more is small (though growing, as gas prices rise). The variable costs are also largely hidden: you pay for gas ahead of time, not when you make the drive vs. train decision, and pay for maintenance later. Meanwhile, you pay per-ride for transit, unless you live in a city like New York with unlimited-ride options.

Pay-as-you-drive insurance would reduce the sunk-cost effect and is just farirer, argues Jason Bordoff in Democracy. It's simple: base insurance rates on miles driven, since the more you drive, the more the risk. As with VMT fees, a few advances in technology to make it feasible would enable the costs of driving to be fairly tied to actual driving.