By Eric Sundquist
One policy tool that holds promise in the effort to manage transportation demand is mileage-based insurance, also known as pay-as-you-drive insurance.
Most motorists today pay premiums that are essentially fixed costs, with little or no connection to the amount of travel consumed. Evidence suggests that if insurance were more like motor fuel, with a direct connection to use, the price signal would encourage more efficient travel.
The good news for advocates of this approach, writes Allen Greenberg, Manager of Non-Toll Pricing Initiatives for the FHWA, is that insurance companies are increasingly drawn to using telematics to assess risk. And one of the things telematics can tell insurers is mileage driven.
The bad news is that insurers may use telematics in a way that helps them assess risk without communicating price signals to motorists.
Greenberg, whose article appears in the Center for Insurance Policy & Research newsletter, writes:
The benefits of having consumers appreciate how their driving affects their rates, and then being provided an opportunity to change behavior to save on premiums, may be lost if “black box” pricing becomes the norm. (“Black box” pricing refers to where an insurance company gathers and applies usage-based data in premium setting primarily for improved market segmentation—to offer the most attractive rates to the lowest-risk drivers within any rate class—but without the consumer having any detailed knowledge as to how their usage characteristics affect their rates.) This concern is not just theoretical since the majority of the almost two million people who have signed up for telematics-enabled insurance products are not provided by their insurance carriers significant personalized guidance about reducing their crash exposure and earning premium savings as a result.
Greenberg cites polling that shows that 60 percent of drivers—and 76 percent of younger drivers —would alter their driving to save on premiums if they could. He concludes that “The most significant voluntary reductions in driving resulting from [pay-as-you-drive insurance] would be expected for products that offer both a reasonable amount of pricing transparency and pricing that is presented and structured in a way that empowers consumers to secure a better rate by reducing their risk exposure over time.”
Eric Sundquist is Managing Director of SSTI.