7/24/2011

Pay Per Mile Insurance


Abstract

High insurance cost is one of the serious financial problems that today’s drivers are facing. It appears to be that in the current time based insurance system the insurance companies are charging premiums for the risk of driving while the vehicles are parked. Independent surveys and interviews of the insurance customers were conducted. The literature and available reports on the topic were utilized also. Distance-Based auto insurance rating could be an answer to the problem discussed because it measures the distance of the risk being insured..

SECTION I: DEFINITION OF PROBLEM

In state of Michigan, the law requires automobiles to be legally insured to drive on public roads. Insurance is offered by several private insurance companies or by the State of Michigan through the Pool called JUA, also known as Joint Underwriters Association. The auto insurance is offered using only one rating system which is based on time. The rising cost of insurance is burdensome on the drivers.

Statement of Problem

1.1 million drivers are driving without insurance. Insurance companies are rating the driving risk while vehicles are parked. It could get worse if nothing better is offered to make it affordable.

Purpose of study

1.1 million Drivers are driving uninsured in the State of Michigan alone. The root cause for increase in total number of uninsured drivers in the State of Michigan is the soaring cost to insure a vehicle. Insurance companies should realize that there is something seriously wrong with the insurance products being offered because a high number of drivers are unable to pay for insurance.

This state’s insured drivers in 2001 paid $65 million in surcharges to cover the medical bills of passengers in uninsured autos. But that’s just a fraction of the total cost. The cost of treating injured drivers of uninsured cars is picked up by hospitals and other insurance programs, including forms of welfare. That means higher insurance premiums and taxes for all Michigan residents. (Detroit News, 2003)

The insurance companies and other agencies should pay attention to the reason why 101 million drivers are uninsured. Could it be that the system being used to rate the risk is unfair or too harsh?

Limitations of study

The primary and secondary sources are used to conduct this study. Independent surveys and direct personal interviews on individual basis of current auto insurance customers are the primary sources. Books, reports, magazines, newspapers, and articles from the internet were used as secondary sources. Since it is a fairly new concept and there weren’t enough studies done in the United States alone, some of the data was used from England and Canada also.

SECTION II: REVIEW OF THE LITERATURE

Everyone who drives in the state of Michigan on the public roads must keep a valid proof of insurance. Because of the soaring costs to insure a vehicle, many drivers buy insurance on installments and pay the minimum required payment to start the policy on a payment plan which could be good for six months to a year in most cases. Those newly insured drivers then cancel the insurance policy or let it cancel for non-payment, which puts unfair burden on the rest of the law abiding drivers who properly insure their vehicles. Due to the problem of uninsured drivers, insurance companies are losing money on premiums collected and are passing their losses to the consumer. This is one of the reasons why the costs of insuring an automobile are going up. The insurance industry should invest into finding affordable ways to insure the risk of driving and one of the options they can offer is distance-based insurance. In this concept, one can insure the miles estimated to be driven, instead of paying for the time the vehicles are parked in the traditional time-based insurance system. The State of Texas along with few other states is already looking into finding alternative pricing, as a matter of fact, Norwich Insurance Company, in England, and a few other insurance companies in Canada are already testing distance-based pricing pilot program.

Related literature review topics

In Forbes magazine, an article enquired,

Econ 101 says that when something is free, people consume too much. In this case, all you can drive insurance encourages people to drive more than they otherwise would if they had to pay the full cost of each mile. The heavy drivers don’t bear the total costs related to their actions—hospital bills, body-shop bills, highway low mileage drivers (e.g., women, who drive half as much as men) get raw deal (Ayres & Nalebuff, 2003).

The list below is the benefits that pay per mile insurance system will provide:

1. Increased insurance affordability

2. Ideal for retirees, stay home mothers, unemployed workers etc.

3. Reduces road crashes. It creates an incentive for young drivers to drive less which will ultimately decrease crashes and provide added peace to the parents of those young motorists.

4. It gives a choice to the motorist to choose between the two systems; whichever they may find suitable to their needs. It will create an option to insure the secondary vehicle under pay per mile pricing system and the main vehicle in the traditional system if they choose it to be suitable.

5. Much more accurate actuarial cost determining to charge the premium on the individual driver’s bases. Less driving drivers will pay less and a driver with high driving mileage will pay accordingly.

6. Gives incentive to reduce driving mileage.

7. Reduction in driving will result in fewer crashes and fewer insurance claims.

8. Reduces the energy consumption.

9. Helps improve environmental conditions

10. Decreases the congestions on the roads.

11. Most of all it saves money to those who deserve to save.

Definitely there are cost and other concerns that are associated with Pay per mile plan:

1. Research cost

2. Implementing cost

3. Operating system set up cost.

4. Difficulties in determining the amount of the mileage to insure.

5. Mixed political support.

6. Unsure consumer of the benefits of this pay per mile rating system.

7. Opposition from those motorists who are or may end up paying more due to their high driven mileage.

8. Insurers concern of decreasing their profits.

Let’s discuss the above-mentioned benefits and implementing difficulties as well as the concern raised above.

Insurance Rates

Rating an insurance policy or individual risk is a very complicated process. Some of the basic information that is used to estimate the risk being insured in an automobile policy includes, age, the type of the vehicle being insured, driving and claims records, the area the vehicle is being park, how the vehicle is being used, prospect’s credit worthiness, and amount & type of the coverage required.

The Texas Department of Insurance posted an article on their website www.tdi.state.tx.us in February 2005 titled “Automobile Insurance Price Comparisons”. In the article regarding the understanding of rates, it states that,

Auto insurers evaluate your risk for a claim using your driving record and numerous other factors, including the type of car you drive, the area where you live, your claim history, your credit score, your age, and how you use your car (business, pleasure, or to drive to work). Your rates are based on your risk for a claim. Accidents tickets or claims can increase your rates. If you have accidents, tickets, or claims on your record during the past three years, your rates may be higher” (Texas Department, 2005)

C. Henn of Rockville, MD writes in an article prepared for The Institute for the Analysis of Global Security (IAGS) called, “DISTANCE BASED AUTO INSURANCE: A TOOL FOR OUR TIMES” page 1, “Currently most insurance policies provide a tiny reduction in rates for people who claim to drive fewer miles. Since they don’t verify these claims, they don’t provide more than a couple percentage points off premiums” (Henn, 2003, p.1).

The current motor vehicle insurance rating system is economically insufficient, because prices do not reflect an equal burden onto the drivers who drive more miles. It actually benefits those drivers and does not consider those drivers who drive occasionally or not at all and puts them on a disadvantage. It cannot be a fair rating system.

The Victoria Transport Policy Institute states, in the TDM Encyclopedia, Converting Vehicle Insurance Premiums Into Use-Based Charges Mileage-Based Insurance, Per-Mile Premiums and Insurance Variabilization means that a vehicle’s insurance premium is based directly on how much it is driven. The more you drive the more you pay and the less you drive the more you save. This can be done by changing the unit of exposure (i.e., how premiums are calculated) from the vehicle-year to the vehicle-mile/kilometer or vehicle-minute (Victoria transport Policy Institute).

In the current insurance rating system, one has none or very little control over the cost. If one pays little attention to all of one’s auto expenses, it will not be too difficult to realize that most of the vehicle related costs are fixed. For example, monthly payments of the vehicle, depreciation, annual taxes, registration and plate fees etc. The current auto insurance system is a fixed cost which is why the introduction of this idea to pay per mile insurance rating system will convert this fixed cost to a variable cost which will benefit the customers and give them control over their insurance cost.

In the act enacted by the LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Subchapter A, Sec. 1. DEFINITIONS.

“Mile-based rating plan” means a rating plan for which a unit of exposure is one mile traveled by the insured motor vehicle”.

“Time-based rating plan” means a rating plan for which a unit of exposure is a unit of time” (Texas Legislature online).

Beneficial to the Type of Consumer

In general, most people will enjoy the benefits of this system. The list especially includes seniors, students, stay home mother or spouses, low income consumers, laid off workers and drivers with more than one vehicle. It would also benefit insurance companies by receiving fewer claims because of the reduced driving the consumer will anticipate in striving to save on insurance premiums. It will give opportunities to more drivers to drive insured vehicles, which means more business to insurance companies. Ultimately reduction in driving will benefit the environment by burning less fuel to drive the vehicles, save lives because of the reduced numbers of accidents, road maintenance, and congestions on the roads.

According to the Insurance Journal,

The National Organization of Woman (NOW), which drafted the language HB 45 (an article in act for the state of Texas), maintains that as a class women drive about one-third fewer miles than men do and they tend to have about half the number of accidents. In fact, NOW may possess the most comprehensive research on the entire mileage-based issue (Roof, 2001).

Seniors who are on fixed income are really disadvantaged with this current insurance system. Because of their limited driving, in most cases, they would save the most in mileage-based rating. In the current system they buy 6 month to a year worth of auto insurance policy weather they drive five miles or 50,000 miles in the policy term. In the mileage-based insurance rating system, they will buy 10,000 insured miles for example and they can drive them in 6 days or 6 years. They will not have to buy their selves insured miles till they are driven.

Students who are dependent of their parents or are working part time to support their education and themselves are over burden by the insurance cost. Due to the expensive auto insurance, they drive uninsured in many cases or simply because they paid their insurance and will keep on driving as long as they can afford gas. There is no incentive for them to drive little in the conventional insurance rating system. If they can buy the miles instead, they will have the incentive to drive less and save their mileage to save the money.

Reduction in Road Crashes

One of the major dangers involved in driving is road crashes. It is a proven fact that the more a person drives, the more he or she is exposed to road crashes. The conventional insurance system has no or very little incentive to drive less. This ultimately leads to driving more and exposing people to more crashes and injuries. If there are more claims that insurance companies have to pay out, the higher they will have to charge the insured drivers. Instead, the pay per mile insurance rating system offers the incentive for drivers to drive less and save on insurance cost. Driving less will result in less road crash injuries reducing the claims payouts to decrease the cost to buy insurance. It will also create opportunity for young drivers to drive insured vehicles without paying a high premium and at the same time drive less to save the insurance mileage. The less the young drivers drive the more peace of mind it will offer their parents.

“Collisions for young people aged 16 to 24 rises by 41 percent. The total number of fatalities rises by 50 and personal injuries by 3,900, for these younger drivers” (Insurance Bureau). Berkeley professor A. Edlin calculates that “driving would be cut back by 9%, with an insurance savings of $8 billion a year” (Edlin, Forbes, 2003).

High miles driven per year tend to raise the risk of crashes per year, even if everything else is equal. A perfect driver also faces risk of a crash from causes beyond their control, such as an animal running into them on the road, a mechanical failure or sudden health crises on the roads can all be reduced by reducing the driving mileages. Now try to imagine high-risk drivers who tend to have much more odds of having higher numbers of crashes.

Provides Choices

It is human nature to want choices. There are choices available in the types of vehicles, such as coup sedans, station wagons, trucks, utility vehicles, mini vans, full size vans etc. Then there are many different choices of manufacturers with the different sizes of engines. Choices are also available in Vehicle colors. It is obvious that the consumer today demand different options and choices. Why not offer choices in insuring their vehicles. Pay per mile insurance rating will do just that. While the conventional (time based) insurance rating system remains in effect and available to the consumer, there should also be pay per mile rating being offered.

Market research and requests to participate in the pilot programs which offer PAYD have indicated strong consumer interest in PAYD policies. A UK pilot study by Norwich Union wanted 5,000 subjects to test their pilot program and receive more than 6,000 requests for participation before officially announcing their project. According to a Norwich Union survey, nine in ten say they would prefer their motor insurance to reflect the usage of their car and the type of journeys they make—with the majority favoring pay-as- you-go systems similar to those offered by gas and electricity suppliers (IBM, 2004).

Customers may want to insure and maintain a second vehicle for pleasure use or to just simply have it for back up. In the current insurance system, those cars are treated like the primary vehicle and the cost to insure it doesn’t change either. Due to the insurance cost many customers cannot afford to maintain a second vehicle. Pay per mile insurance rating system will offer the option to insure the extra vehicle.

“Proponents of the plan say older drivers, women, lower income drivers, households with more cars than drivers and commuters will all benefit from the new auto insurance policy”(Mile-Based Car Insurance,2003).

Improved rating accuracy

No one likes to pay more than they really should, in other words, who would like to get less than what they pay for? In the State of Michigan, our auto insurance rating system is just that, because we pay for unlimited driving for a limited time, we actually pay for unlimited risk and drive much less in most cases. On the other hand a driver who drives a great deal pays less than he or she should. Consumers with less driving mileage are paying for the risk of drivers with high mileage. Portland resident, Colleen Waters, is quoted by Jacklet, B. in The Portland Tribune saying, “If I do not want to pay for gas, I don’t have to. If I can’t afford to get my car fixed for a while, I don’t have to. But I still have to pay my insurance every month, whether I am driving or not. I find that annoying” (Jacklet, 2003).

“Like factors such as age and driving record—has long been correlated with accident risk. The more you drive, the higher the chance of a crash” (Murray, 2003). But unlike a driver’s age and record, how far you drive is not much of a factor in determining your premium. Some companies do offer low mileage discounts, but they don’t come close to capturing the actual difference in accident risk between high and low mileage drivers. Todd Litman, director of the Victoria Transport Policy Institute in British Columbia, has done extensive research on the relationship between annual mileage and insurance claims. “His studies suggest that if other risk factors—such as age of driver, time of day, and type of driving—are constant, then accident risk tends to increase in a roughly linear relationship with mileage” ( Victoria Transport Policy, 2004 ). Translation: If you drive twice as much, you’re about twice as likely to have an accident.

Reduction in Energy Consumption

Pay per mile insurance will decrease our country’s dependency on foreign oil. Just as it offers an incentive to drive fewer miles and save on the cost of insurance, it will also cause people to buy and burn less fuel. It is a simple logic, the less they drive the less they will burn gas. Because our country will have to import less oil from other countries, the less we will have to depend on them.

Improvement of Environment Quality

One of the most important and critical areas that needs improvement is the quality of our environment, which could benefit by the pay per mile insurance rating system. The qualities of the environment we breathe and live in, deserves the improvement. If we only try to pay little extra attention, we will come to the conclusion that the use of automobile plays a major role in deteriorating the quality of the environment. It will surprisingly be a positive step toward the efforts that are badly needed to make it better. Simply if vehicles driven by oil are used less it will contribute less in worsening the quality of our air and space. Our government and private agencies invest billions of dollars every year to improve the quality of the air that we breathe. This would be a step to support their efforts.

As A. Edlin calculates, pay per mile insurance rating will decrease 9 percent of driven miles. It means it will cut down 9 percent of oil consumption. At the same time, it will improve 9 percent of our environment with out investing anything extra. (cited in Murray, 2003).

K. Funderberger provides some interesting figures in his report.

PAYD policies simply and logically reward low-mileage drivers by charging them less money in return for less auto use, which results in tangible environmental benefits. The typical driver travels 14,000 miles annually, but gas consumption varies widely. If your car is averaging 20 miles per gallon, then you are using about 700 gallons per year. Combustion from car operation converts this into approximately 14,000 pounds, or 7 tons, of CO2. Automobiles account for more than 25% of greenhouse gas emissions in the United States. Research expects widespread adoption of PAYD policies to reduce driving by 10-20%, resulting in significant decreases in greenhouse gas emissions and resulting global climate change and air pollution (Funderberger, 2003).

Decrease in Road Congestions

Traffic congestions are one of the most stressing situations that drivers in Michigan face almost everyday. These traffic congestions cost dollars, time, increase in pollution, and most of all adds stress.

Washington State of Transportation market survey research indicates that offering vehicle insurance discounts based on reduced driving mileage is one of the most attractive incentives to encourage commuters to shift to ridesharing and transit. As a result, King County Metro, The largest rideshare and transit agency in the Puget Sound region, is currently seeking to partner with an insurance company to offer PAY insurance to its 150,000 Transit Pass holders (Bonner, 2003).

“Residents [of Detroit] Spend 57 hours in jams, but congestion is up even more across the U.S.” It also says “Too many cars on too few roads caused Metro Detroit drivers to waste 57 hours in rush-hours a year earlier”. In another spot in that article T. Greenwood writes, “When it comes to congestion, Detroit traditionally lands in the Top 10 (most congested) city list, Said D. Wschrank, co-author of the study”(Greenwood, 2005)

The total cost of congestion in the form of delay and increased fuel consumption in the United States exceeded $49 billion in 1992 and$31 billion in 1987. This study valued time at $8.50/hr. in 1987 and $10.50/hr. In 1992, which would appear a considerable undercounting to those who would far prefer to be at work than stuck in a traffic jam. It projects this figure to $60 billion in 1995 (Schrank, Turner, and Lomax, 1995). While Delucchi (1997) estimates “congestion costs at $22.5 to 99.3 billion.

Reducing Parking Problems

In urban areas or around downtowns, where most business offices are located, are many parking problems due to paying parking lots. Most employers end up buying monthly passes to pay for their employees’ parking. If commuters start to carpool with each other, it will decrease parking problems as well. City governments lose enormous amounts of money to manage illegal parking and lack of collection for fines, that it cost them even more than initially thought of.

One solution recommended by Shoup (1997) is,

To offer commuters cash, transit passes or another alternative to free parking with comparable value. Like other measures to increase parking prices, the effectiveness of cashing-out varies with the road network and with the distribution of trips. Parking fees are seen to be more effective in the San Francisco Bay area than in Los Angeles where much of the traffic passes through, and (through latent demand effects) could weaken the potential congestion relief from a reduction in driving by commuters.

Saves $s

In conventional time based insurance system many of the consumers are paying liability insurance premium on a vehicle while it is being parked. What risk is being covered in that case? Thousands of senior citizens, non-working mothers and medically ill folks are being ripped off of their hard earned money. It is a fact that every driver drives a different number of miles due to change in their circumstances and needs. However they pay the cost of insurance that the insurance company assigns to a group of drivers. No matter how much or how little you drive your car; you pay the average according to the mileage driven by all the drivers in that group or pool.

Pay per mile auto insurance rating system will still rate the cost of insuring a vehicle in a group you fit accordingly, however, you will pay only the mile cost that you drive. Those drivers who drive less due to whatever circumstances, they will not have to pay for auto insurance any more than they have utilized. Pay per mile rating system saves those hard earned dollars for less driving drivers. It will save money on the environment cleaning cost because of less fuel burning due to the incentive for driving less.

“In Texas an average drive in a group drives 10,000 mile per year and pays a $400.00 dollars a year for basic coverage required by law. At that rate it cost 4 cents per mile to insure your vehicle to drive (Cents-per-Mile, 2002)”. Now in pay per mile insurance you will have the control over the usage of the mile. For example, one could buy insurance for 5000-miles at minimum to start with and then add additional miles at the increment of 1000 miles at a time. You will pay again only when you are at the last 1000-mile to renew your miles and adjust the number of miles for your needs. One could take one week to drive all their miles or 5 years and it would not cost them any extra, as long as they do not drive uninsured or insurance rates do not go up.

As in every walk of life, there are two opposite views for everything. While most people like the concept of PAY PER MILE INSURANCE RATING SYSTEM, there are some concerns people have regarding this fairly new concept. Below pages will discuss many of those concerns step by step.

Research Cost

Most of the insurers have a major concern with the research cost. They are concerned with data collection and time involved in testing the concept. Incomplete data and premature concept could be a disaster to the financial well being of the insurance companies or consumer. While it is a valid concern, it is not a problem at all. If all insurers collect most of the data to rate the risk, they can start collecting the data sample to use in future. The most important question they will have to collect will be the type of use and the total mileage driven in a policy term.

Training Cost

Insurers are concerned with the training cost of the employee and the other staff involved in pay per mile rating related transactions. Their stand is that it can be costly, so they would have to pass that cost on to the consumer.

System Set up Cost

Operating system setup is another area insurance companies will have to invest in simply to be able to start processing this innovative rating system. They will not only have to have an operating system created, it will also have to be tested. All of these activities have a price tag. There also is Actuarial set up which can take a long time to have enough and accurate data to set up. Actuarial research is another cost bearing activity required.

Difficulties in Mileage Records

One of the major concern insurers have, is not being able to measure the mileage driven. They will be much vulnerable to the fraudulent mileage reading. How could the insurer be able to keep track of the mileage driven? It causes them to not be able to collect premiums accurately, which means loosing on the premium dollars.

Mixed Public Support

Most customers who oppose the Pay per Mile Insurance system do so simply because they do not understand the concept. They are unfamiliar of the benefits that come with it. There is not enough media coverage for this new concept for them to be aware of the advantages. They are careful of unfamiliar rating systems and are not willing to try this new concept without learning the pros and cons.

Opposition from the high mile drivers

One of the stronger opposition comes from the drivers who drive a lot. Naturally, they are concerned with the high prices that would reflect these high miles they drive. They could end up paying more to drive like they pay at the pump. In the current conventional insurance rating system all they do is pay for fuel and they drive as much they can or want to drive, without paying any extra cost for insuring those vehicles.

T. Litman at Victoria Transport Policy Institute for The Institute for Public Policy Research writes in his report titled “Implementing Pay-As-You-Drive Vehicle Insurance”, “Higher-mileage motorist tend to oppose mandatory PAYD because it would increase their costs. Most consumers are unfamiliar with its full benefits, and many are skeptical of change” (Victoria Transport Policy Institute).

Insurers are concern for their profits

Insurers are concerned for their profit. To them, consistent projections are important to the forecast. Their budgets depend on those carefully crafted projections. Fewer premium dollars translates to less profit. Less profit can cause down sizing and employees lay offs.

The liability risk arises when the vehicle is being driven. If the vehicle does not run on the road and is instead just parked, it can not be a liability risk to a driver or insurer. However in the time based insurance rating system if the vehicle is parked it still pays for the liability risk coverage. That coverage is a pure profit to the insurance company. If they shift the conventional rating system to mile base insurance system, the insurance companies are concerned with the loss of that profit. However, they underestimate the savings from the decrease of claims and pay outs in long term and short term injuries, their treatment cost, and other benefits to be paid related to those claims.

Why industry itself did not use this concept

One of the reasons the industry was reluctant to discuss and explore the mile base insurance concept was because of the lack of technology to keep up with the critically important data, such as the mileage driven. Who drives it and how many drivers are involve in a household. Younger drivers could be a disastrous risk to cover if the insured does not include them in the insurance risk of being insured. Today the technology is so superior compared to in 80s. Prior to the 90s, vehicles were not equipped to collect or keep driving data in memory other than the speed-o-meters. The speed-o-meters use to be mechanically set up, which could be tampered with easily. Nowadays, the technology has been improved to a electronically set up system, which makes it harder to tamper with and keeps the data elsewhere also, such as on board computer system which is standard in every car now.

As for the concern to the number and age of drivers, in a household it can be managed by the public information available from the state of Michigan. In conventional rating system, insurance companies are collecting the same information for the same reason. It will not be any extra investment new to the insurers.

Elapses in continue coverage

In the middle of the trip if the insurance mileages run out, it could create a lapse in the coverage. People could be driving uninsured. It can cause elapse in their coverage. In the current system, if someone is on a trip in another state and the time of the coverage term is running out, the customer can call their insurers or prearrange the renewal of their policy before going to the trip. Same can be practiced in the mile base system. The phone technology and debit cards have given solutions to those concerns already.

Cancellation and renewal Notices

In traditional time based insurance, it is very easy for an insurance company to be able to send a renewal or a cancellation notice. They know exactly when the policy is to be renewed and will send a renewal notice 30 days prior to renewing an insurance policy. If the policy is not paid within the specific time stated in the policy they cancel that policy according to the state laws. In the mile based policy, it is not as easy to predict when the policy miles will be running out. So the insurance companies cannot issue a cancellation notice or the renewal notice.

One way to deal with this problem would be to set up a reminder plan, according to the mileage track records. Insurance companies should be able to predict about when the mileages for each customer should be running out. The insurance companies should send reminders to check the insured’s auto mileage to determine if they need to renew the mileage to drive any further.

In the early years, insurance companies should require the insured to report their mileage. This would produce the data that is critically needed. Besides sending cancellation notices is not friendly mail. Instead sending friendly reminders should not be so threatening. It will decrease the hostile impression.

Political opposition

One may not think that political opposition would also be a factor. Believe it or not it is. As mentioned above, pay per mile will help decrease the amount of driving which consequently will decrease the fuel consumption. Less driving will cause less sale of fuel and generate less fuel tax to the government. It also bothers fuel importer’s lobbyists who pressure the government to not consider anything which could compromise their interest.

The political opposition needs to realize the savings that could be gained from less accidents and public services costs, road maintenance costs, and environment improved quality. “Oregon relies on the gas tax to pay for its road system” (Whitty, 2004).

Implementing of PPMI

Implementation of this new concept in the state of Michigan will require participation from each insurance company who wants to participate in this innovative rating system. It should be implemented by each individual insurance company. At the start, insurers should offer this Pay per mile insurance rating system as an option along with the traditional time based insurance rating system. Private companies should cooperate with insurers in promoting this concept and state government should offer some incentive to insurers to participate in offering this option. After all, it is going to offer the benefits to all classes of life.

The biggest concern is how to verify the mileage driven, but it is fairly simple to obtain that information. All of the vehicles manufactured in 1991 or above are equipped with an on board computer systems. This computer system is capable of keeping driving mileage records independently from speed o meters. Besides, the speed o meters and computerized sensors driven are so sophisticated these days that it is not very easy to tamper with them. If one thinks that the same speed o meters are good enough for auto leasing companies to rely on, then it should be accurate enough for the insurance companies to rely on also. This should not cost extra.

For the older vehicles without the on board computer system, the verification of mileage can be done by the repair facilities. If we look in the past to a few years ago in the late 80s, we will find the time when the Federal government required the state of Michigan to implement emission system to control the pollution in the environment. This task was performed through the repair facilities. Currently AAA Michigan (a major insurer in the state of Michigan) and Geico Direct (another insurer) gets their physical damage inspections for comprehensive and collision coverage through different repair facilities or their branch offices. Same can be practiced for mileage verification. Allstate Insurance Company, State Farms Insurance Company, and Auto Club of Michigan are the largest insurers in Michigan. They have their own approved damaged auto repair facilities and run repair estimates for each of the insurers. Insurance companies rely on their estimates and audits their repair estimates on a random occasions. If measures mentioned above are good enough for their purposes, then same can be utilized for keeping track of the mileages. This also should not cost extra. In Massachusetts, Professor J. Ferreira Jr. is working on a pilot program for usage-based auto insurance products. He expects the pilot program to produce as followed:

The Pay as You Drive Pilot will be working with Value pricing program staff, including their statisticians, to analyze data on an ongoing basis. We expect to issue a final pilot analysis of “Before” and “after” data at the end of the 36-month pilot and an interim report after the first year of observation. If the results look promising, our goal will be to work with FHWA and the Massachusetts Division of Insurance to develop an approvable usage-based auto insurance product for the broader public (Ferreira, 2001).

The Progressive Insurance Company introduced its Autograph vehicle insurance coverage, a form of distance-based insurance in the state of Texas in 1999. This uses Geographic Positioning System (GPS) beacons to track vehicle location and use (motorists pay more for driving under higher risk conditions). This program has been successful, and Progressive is planning to expand it into other markets (Carnahan, 2000).

Many Vehicles these days are equipped with GPS. This system is capable of collecting much more than just the mileage of each vehicle equipped with GPS system. While it is the most accurate and reliable system, it has a big price tag attached to it. However, the process may need state legislature to pass and enforce some laws to limit the information that can be collected. This would provide the confidence and peace of mind to the consumers who have concern with invasion of privacy. According to the report by the Victoria Transport Policy Institute’s TDM Encyclopedia which was updated on June 4, 2004 says,

There are concerns that odometer fraud could be a problem, but odometer audits should provide data as accurate as that used in other common commercial transactions and more accurate than self reported information now used for insurance pricing. Most tempering can be detected during audits and crash investigations, and fraud would void insurance coverage. Vehicle manufacturers produce increasingly tamper-resistant odometers since leases, warranties and used-vehicle sales all rely on odometer readings. Audits would provide additional benefits, including accurate mileage information for used-vehicle buyers, and more accurate information for transportation planning (Victoria Transport Policy Institute).

In Ontario Canada, an insurance broker known as (AVIVA) has introduced a device called (Autograph ™). This device is designed to collect the information such as time of driving, driving speed, and the distance of driving. It is connected to the on board computer under the dashboard of every vehicle manufactured after 1991. AVIVA is currently collecting a refundable security deposit from their participating customers. The Pilot program is in affect in Ontario only at this time and is not used for mile based insurance system.

The first insurance program offered in Canada to reward responsible drivers with lower premiums. As a broker, have you ever felt the insurance companies lump all of your customers with every other driver on the road, regardless of how they drive? Wouldn’t it be nice if more responsible driving habits could be reflected in the cost of auto insurance?

Until now, it hasn’t been possible to provide auto insurance pricing that truly reflects how a car is driven. Autograph is about to change all that and AVIVA group brokers will have the opportunity to share this new and innovative approach with your customers.

Autograph will reward drivers who use their vehicles in ways that lower the risk of collisions. These include:

Driving fewer kilometers than average.

Driving at safer times of the day when incidents are less likely to occur.

Driving at slower speed.

AVIVA believes that responsible drivers should be rewarded by paying lower auto insurance premiums. They also believe that customers should have the opportunity to control how much they pay” (How Autograph Works, 2005).

SECTION III: METHODOLOGY

Independently collected data

To gather a sample of how the consumer of insurance industry will respond to this concept, I have independently done some public interviewing, held a group discussion, and done a survey. A result of the sample survey is attached at the end of the report for verification.

Three key questions of personal interview among 10 other questions were as mentioned below:

Are you happy with the rating system for auto insurance available to you in the state of Michigan now?

The answers were asked in three variables of either yes, no, or not sure. For the first key question in the 43 samples of interview question 35 responded “No”, 2 responded as “Yes” and 6 responded as “Not sure”. To the question of do you have control over the insurance cost?

The answer to this question had given 3 variable of yes, no, or not sure. 40 respondents out of total 43 interviews replied “No”, 1 respondent out of 43 replied “Yes”, and 2 replied “Not sure”. When asked the 3rd question of, would you like to have an option available? All 43 samples of interviews had only one answer. 100% responses were “Yes”, which means every one of the interviewed want an option. To translate in percentage responses to the question, one of the above comes to 84.4% were not satisfied with the rating system used to charge the risk of liability insurance in the State of Michigan. Only 4.6% percent are happy, while 7.2% were not sure.

Responses to Question #2 in the above interview key questions were 93% who chose to reply “No” over having control on the cost of insurance, 2.3% said they did have a control over the cost, while 4.7 % were not sure..
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