California motorists who spend little time on the road could pay significantly lower insurance premiums with new “pay-as-you-drive” auto policies starting in February.
To be offered first by California insurance giants State Farm Mutual and the Auto Club of Southern California, the new policies are designed to provide an incentive and reward for drivers who drive less. Other insurers are expected to follow.
Under State Farm’s plan, customers would provide their vehicle’s actual mileage at the time they sign up for the program or they could automatically transmit their mileage if they have the OnStar computer-communication system in their General Motors Co. vehicle.
Subsequent mileage readings would be personally recorded by a State Farm agent or determined by third-party verification services using servicing records, Carfax reports, California Smog Check data or other sources.
The Auto Club would use similar verification services and also give motorists the opportunity to install an automatic mileage data transmission device in their car.
State Farm estimates that “ultra-low-mileage” drivers — less than 2,000 miles a year — could save up to 45% of the cost of a six-month premium compared with current rates based on a driver’s own mileage estimates. Premiums from its Drive Safe & Save program could drop by hundreds of dollars a year, State Farm said.
State Farm, California’s No. 1 seller of private car insurance, intends to aggressively market the new product. The company expects eventually to sign up about one-fourth of its 3.3 million policyholders in the state.
More accurate customer mileage readings should translate into better risk underwriting, spokesman Bob Devereux said. Less driving should lead to fewer accidents and lower premiums.
“We believe in the long run, if we’re better matching price to risk it’s good for the customer and good for the company,” he said.
The Auto Club, the state’s second-largest car insurance company, estimated drivers’ potential savings at between 1% and 10.5% depending on how much someone drives a year. It said members who opt for its verified mileage program could save an average of $68 per vehicle compared with customers who keep their traditional coverage.
Making the new pricing plan available has been a top priority for outgoing Insurance Commissioner Steve Poizner. “The voluntary pay-as-you-drive initiative is an innovative program that will allow insurers to offer plans based on more accurate mileage, so that people who choose to drive less will pay less for auto insurance,” Poizner said.
Environmentalists, who were some of the first proponents of pay-as-you-drive auto insurance, were pleased.
“This encourages and rewards drivers to lower the amount they drive,” said Lauren Navarro, an attorney with the Environmental Defense Fund in Sacramento. “Just not taking unnecessary trips will help us to meet our clean air mandates and global warming pollution mandates.”
The launch of pay-as-you-drive is expected to spur competitive plans from most of California’s insurers. Almost all of them early on expressed interest in the concept.
“Once there is a sense of how this is working for State Farm and the Auto Club, more insurers will be compelled to offer the same thing,” said Deputy Insurance Commissioner Joel Laucher.
State regulations also seek to ensure that mileage information will be used only to set premiums and that the data will not track a motorist’s driving habits or compromise a customer’s privacy.
State Farm policies will be available for sale to new and renewal customers on Feb. 28. Auto Club members can sign up starting Feb. 1.
Consumer advocates generally hailed the plans as an innovation. But Douglas Heller, executive director of Santa Monica-based Consumer Watchdog, said he clearly preferred the State Farm plan. It increases rates more gradually, with prices going up for every additional 500 miles driven.
The Auto Club uses just four steps of 2,500 miles each for the first 10,000 miles driven and, above that, seven more steps of 5,000 miles each. The Auto Club says its formula is more fair to drivers who occasionally run up their mileage with long vacation trips.
“Auto Club doesn’t give drivers a serious opportunity to lower rates,” said Heller.
“With State Farm, if you cut out 500 miles a year, you save some money.”