Basing Car Insurance on How Much You Drive

Pay-as-you-drive, or PAYD, auto insurance ties your annual premium to the amount you drive, but there's some controversy about how insurers are handling the new concept.

The way it works is that the less you drive, the less you're charged for insurance, since a portion of your insurance fee is changed from a flat rate to a per-mile fee.

According to the Victoria Transport Policy Institute, auto insurance averages about $800 per vehicle per year in the U.S. -- a significant portion of a person's total vehicle costs. Its research indicates that the more miles driven, the higher the crash rate.

Applying the PAYD concept in setting rates makes for a more equitable price structure by rewarding those who reduce their chance of having a crash by driving less.

It replaces the current system that overcharges drivers who drive less than average (also disproportionately low-income people) and undercharges drivers who drive more than average. Since a greater portion of low-mileage drivers are uninsured (thus reducing the funds to subsidize higher-mileage drivers), current pricing drastically overcharges people in lower-income areas, according to the Institute.

Note: Other risk factors such as driving history and vehicle type would still apply in combination with PAYD. For example, someone with a good driving record might pay six cents per mile for coverage, while someone with a bad driving record might pay ten cents per mile.

The Environmental Defense Fund advocates this new approach to insurance pricing in its October 2006 (updated May 5, 2008) Pay-As-You-Drive Auto Insurance article, stating that PAYD "is expected to reduce driving and congestion by 10 to 12%.

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