Drive (PAYD) insurance

Introduction
Some states are considering adopting Pay as You Drive (PAYD) insurance as a means of reforming
how automobile insurance is provided. Under PAYD, insurance premiums would be transferred
from annual costs to variable charges, based either on gallons of gasoline purchased (sometimes
referred to as “Pay at the Pump Insurance”) or annual vehicle miles driven. Currently a significant
number of drivers are driving without insurance, even in states where insurance coverage is
required by law. Many drivers purchase additional insurance coverage to pay for damages caused
by uninsured drivers. PAYD would make it more difficult for drivers to avoid purchasing
insurance, thereby expanding coverage and reducing premiums for drivers currently buying
uninsured motorist coverage. In addition, PAYD would base premiums more on a driver’s relative
exposure to a potential accident, rather than other proxies for accident frequency, such as sex of the
driver. Since the likelihood of an individual driver to be involved in an auto accident is thought to
be related to the number of miles he or she drives, or (probably less closely) to the gallons of fuel
consumed, PAYD policies are being promoted as measures to reallocate insurance payments more
equitably among drivers. PAYD would reallocate premiums more equitably in two ways: by
forcing uninsured drivers to purchase insurance, and by basing premiums on a potentially better
measure of accident frequency and/or seventy.
PAYD could have an additional benefit by reducing fuel consumption, Co;? emissions, and vehicle
miles traveled (VMT). By transfering a portion of insurance costs from fixed to variable costs,
PAYD would give an economic disincentive to consumers to drive. To the extent that they reduce
gasoline consumption or VMT directly, PAYD policies may also address a host of problems
associated with vehicle travel, such as emissions of C02 and criteria air pollutants, as well as
traffic congestion. Other annual driving costs, such as vehicle registration fees, safety and
emission control system inspection fees, and driver license renewals, could also be charged on a
per-mile or per-gallon basis, to strengthen the signal to consumers.
Because PAYD can simultaneously address both insurance reform goals at the state level and fuel
consumption, C02, and VMT reduction objectives, it may be attractive to policy-makers at both the
state and federal levels. In this report we examine the effect different PAYD schemes would have
on the provision of automobile insurance. We also examine how PAYD or other variable driving
charges might achieve the national objectives of lowering fuel consumption, greenhouse gas
emissions, and VMT. The next section discusses insurance reform issues, summarizes several
PAYD proposals in California and other states, and investigates the impact of PAM) on insurance
provision. Section 3 summarizes the few attempts made to forecast the effect of a national PAYD
system on fuel consumption and C02 emissions. Based on the California experience, we analyze
in Section 4 the likely impact of a national PAYD system on several interest groups: certain classes
of drivers, the insurance industry, and trial lawyers. A range of possible PAYD systems is
discussed in Section 5, and four national PAYD alternatives are presented in Section 6.