Description
Vehicle insurance is generally considered a fixed cost with respect to vehicle use.
Motorists do not usually perceive insurance cost savings when they reduce mileage.
Distance-based (also called Pay-As-You-Drive and Per-Mile) insurance pricing converts
insurance to a variable cost, so premiums are directly related to annual mileage.
Distance-based pricing makes vehicle insurance more actuarially accurate (premiums
better reflect the claim costs of each vehicle) and gives motorists a new opportunity to
save money when they reduce their mileage. It can help achieve several public policy
objectives including equity, road safety, consumer savings and choice, congestion
reduction, facility cost savings, energy savings and environmental protection. This papercompares several distance-based insurance pricing options, and evaluates concerns
and criticisms. The analysis indicates that distance-based pricing is technically and
economically feasible, and can provide significant benefits to motorists and society.
www.vtpi.org
[email protected]
250-360-1560
© 1997-2011
Todd Alexander Litman
All Rights Reserved
Distance-Based Vehicle Insurance
As A TDM Strategy
10 December 2012
By Todd Litman
Victoria Transport Policy Institute
Abstract
Vehicle insurance is generally considered a fixed cost with respect to vehicle use.
Motorists do not usually perceive insurance cost savings when they reduce mileage.
Distance-based (also called Pay-As-You-Drive and Per-Mile) insurance pricing converts
insurance to a variable cost, so premiums are directly related to annual mileage.
Distance-based pricing makes vehicle insurance more actuarially accurate (premiums
better reflect the claim costs of each vehicle) and gives motorists a new opportunity to
save money when they reduce their mileage. It can help achieve several public policy
objectives including equity, road safety, consumer savings and choice, congestion
reduction, facility cost savings, energy savings and environmental protection. This paper
compares several distance-based insurance pricing options, and evaluates concerns
and criticisms. The analysis indicates that distance-based pricing is technically and
economically feasible, and can provide significant benefits to motorists and society.
What would be the consequences if gasoline were sold like vehicle insurance?
With gasoline sold by the car-year, vehicle owners would make one annual advance payment
which allows them to draw gasoline unrestricted at a company’s fuel stations. Prices would be
based on the average cost of supplying gasoline to similar motorists.
Unmetered fuel would cause a spiral of increased fuel consumption, mileage, and overall vehicle
costs, including externalities such as accident risk, congestion and pollution. Motorists who use
less fuel than average would find this unfair and unaffordable, and so would drop out of the
system, but those who use more fuel than average would defend it because they enjoy benefits.
Such a system would be irrational. It is comparable to current insurance pricing.
An earlier version of this paper was published in Transportation Quarterly, Vol. 51, No. 3, Summer 1997, pp.
119-138. The comprehensive technical report of this study, Distance-Based Vehicle Insurance; Feasibility,
Costs and Benefits, is available at www.vtpi.org/dbvi_com.pdf.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
1
Introduction
This report explores the feasibility of implementing distance-based (also called pay-as-
you-drive, per-mile and usage-based) motor vehicle insurance pricing. Insurance is
currently a fixed cost with respect to vehicle travel. A reduction in vehicle mileage does
not usually provide a comparable reduction in insurance premiums. Distance-based
pricing converts insurance into a variable cost, so reducing a vehicle’s annual mileage
reduces its insurance premiums, all else being equal.
Distance-based insurance is based on the principle that prices should reflect costs, so
consumers who reduce the costs they impose should receive proportionate savings.
Reduced driving reduces the risk of crashes and insurance claims. With current pricing,
claim cost savings that result when motorists reduce their mileage are retained as profits
by insurers, or returned to premium payers as a group. With distance-based pricing these
savings are returned to the individual motorist that reduces mileage. The less you drive
the more you save, reflecting the insurance cost savings you create.
Motorist Reduces Mileage
?
Reduced Crashes
?
Insurance Cost Savings
Distance-based pricing returns to individual motorists the insurance cost
savings that result when they drive less. It rewards motorists for reducing
mileage and makes premiums more accurately reflect the insurance costs of
each individual vehicle.
Distance-based pricing gives motorists a new opportunity to save money. To illustrate
this, consider the situation of a low-income worker who becomes unemployed and so
reduces their vehicle travel. With current pricing they must continue paying the same
insurance premiums, although both their income and crash risk decline. After extended
unemployment they may find insurance expenses, and therefore vehicle ownership, a
major financial burden. With distance-based pricing, motorists who reduce their mileage
pay smaller premiums, but can still insure a car for essential trips, job searches, and
temporary employment.
Distance-based pricing provides a marginal financial incentive to reduce mileage,
allowing individual consumers decide which miles, if any to forego. Any vehicle-miles
reduced consist of lower-value vehicle travel that motorists willingly give up in exchange
for financial savings, representing a net consumer surplus. Motorists who continue their
current mileage are no worse off on average with distance-based pricing (excepting any
additional transaction costs), while those who reduce mileage are better off overall. To
the degree that motorists reduce mileage, and therefore crashes and insurance claims, the
savings that result are net benefits to society, not just economic transfers.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
2
Distance-based insurance pricing can provide the following benefits:
? Increased actuarial accuracy, making premiums more accurately reflect the insurance costs of
an individual vehicle, which is fairer and more economically efficient.
? Improved safety. It reduces total vehicle traffic, giving higher-risk motorists an extra large
incentive to reduce mileage, and therefore the crash risk to themselves and other road users.
? Reduced average annual mileage by participating vehicles, which reduces traffic congestion,
roadway costs, energy consumption, and pollution emissions.
? Consumer savings and affordability. Motorists have a new opportunity to save money, which
is particularly beneficial to lower-income households.
? Reduced need for cross-subsidies from low-risk motorists to provide affordable coverage for
higher-risk motorists. It should substantially reduce uninsured driving.
? Is progressive with respect to income. Since average annual mileage per vehicle increases
with income, most lower-income motorists should save money.
? Improved consumer options. Motorists can choose the price structure that best meets their
needs, and can afford to insure a vehicle that is driven low annual miles.
There are also barriers and costs associated with distance-based pricing:
? It requires insurers and brokers to change how they calculate premiums, develop new
procedures, and modify computer programs.
? When first implemented, insurers will face uncertainty as they develop actuarial experience
with this rate structure.
? Distance-based pricing systems often increase transaction costs. Incremental costs range from
less than $10 to more than $150 per vehicle-year, depending on the system used.
? It makes premiums and insurance revenues less predictable. Motorists and insurers would not
know total premiums until the end of the insurance term.
? It increases premiums for some motorists.
? It has mixed political support, and there may be opposition from some stakeholders.
? Many people are skeptical of predicted benefits.
This report describes and compares various distance-based pricing systems, and examines
their incremental benefits and costs. It discusses their implementation requirements and
various concerns that have been raised about distance-based insurance.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
3
Insurance Pricing
There is growing appreciation of the potential for market instruments to increase
transportation efficiency and address specific problems such as congestion, pollution, and
crashes (USEPA 1997). Current motor vehicle prices are economically inefficient, since
prices do not reflect marginal costs (“Market Principles,” VTPI 2004). Nearly a third of
vehicle costs are external and a quarter are internal but fixed, as illustrated in Figure 1.
Figure 1 Distribution of Vehicle Costs (Litman 2004b)
Internal Fixed
Costs
23%
Internal
Variable
Costs
45%
External
Costs
32%
A majority of automobile costs are either fixed or external.
Figure 2 shows the distribution of typical motor vehicle expenses. Most are considered
fixed with respect to vehicle travel. Insurance is generally considered a fixed cost, since
once a policy is purchased there is usually no savings from mileage reductions.
Figure 2 Distribution of Automobile Expenses (AAA 2003)
Short -Term Parking
& Tolls
4%
Depreciation
31%
Insurance
21%
Financing
6%
Fuel & Oil
19%
Tires
3%
Registration
3%
Maintenance
13%
Variable
Costs
Fixed
Costs
This figure illustrates the distribution of financial costs for an intermediate size car.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
4
Although fixed vehicle expenses have increased during the last three decades, variable
costs have decreased in real terms. As a result, variable costs as a portion of total costs
have declined, as indicated in Figure 3.
Figure 3 Vehicle Cost Trends (MVMA 1995; AAA 2000)
0%
10%
20%
30%
40%
1950 1960 1970 1980 1990 2000
P
e
r
c
e
n
t
a
g
e
o
f
T
o
t
a
l
V
e
h
i
c
l
e
C
o
s
t
s
Variable Expenses
Insurance
The variable portion of vehicle costs declined from about 40% in 1950 to 22% in 2000.
Distance-based insurance increases variable vehicle costs without increasing total costs.
Insurance premiums average about $850 per vehicle-year, resulting in distance-based
premiums averaging about 7¢ per vehicle-mile.
1
Vehicle registration and licensing fees
average about $250 annually, resulting in distance-based fees averaging about 2¢ per
vehicle-mile. Fees of this magnitude would reduce vehicle travel by about 10-12%, as
indicated in Table 1.
Table 1 Mileage Fee VMT Impacts (USEPA 1998, based on Table B.21)
VMT Fee Change in VMT VMT Fee Change in VMT
1¢ -1.6 6¢ -8.7
2¢ -3.1 7¢ -10.0
3¢ -4.6 8¢ -11.2
4¢ -6.0 9¢ -12.4
5¢ -7.4 10¢ -13.6
This table shows predicted vehicle travel reductions from distance-based fees (updated to 2005
US Dollars).
1
For average insurance premium data see the Insurance Information Institute
(www.iii.org/media/facts/statsbyissue/auto).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
5
Relationship Between Vehicle Travel and Crashes
Increased annual vehicle mileage tends to increase annual crash risk, all else being equal
(CAS 1996, p. 35, 242 and 250; Litman 2004c; Ferreira and Minike 2010). Even a
“perfect” driver faces risks from causes beyond their control—an animal running into the
roadway, catastrophic mechanical failure, a heart attack—that increase with mileage.
Annual crash risk is the product of two factors: per-mile crash risk multiplied by annual
mileage. Although higher-risk drivers may crash every 50,000 miles, while lower-risk
drivers may crash only every 500,000 miles, in either case a reduction in mileage reduces
collisions.
Since about 70% of crashes involve multiple vehicles, each 1.0% mileage reduction
should reduce total crash costs by 1.7%.
2
The elasticity of vehicle insurance costs with
respect to mileage is between 1.42 and 1.85, which means that a 10% reduction in total
vehicle mileage reduces total crash costs, insurance claims, and casualties by 14% to 18%
(Edlin 2003).
High annual mileage drivers tend to have relatively low per-mile crash rates, as described
in the box below. This reflects crash rates between different motorists and does not
necessarily apply to mileage reductions by individual motorists. Most risk factors
described in the box do not change when an individual driver reduces annual mileage. A
motorist who drives 10% less in response to a price incentive does not usually become
less skilled, take more chances or shift to a less safe vehicle as a result.
Higher-mileage vehicles tend to have relatively low per-mile crash rates because (Janke 1991):
? Higher-risk motorists tend to limit their annual mileage while high-mileage drivers are likely
to be relatively capable drivers.
? Higher-mileage motorists tend to drive newer, mechanically safer vehicles.
? Urban drivers tend to have higher crash rates and lower annual vehicle mileage.
? Higher-mileage motorists tend to do a greater share of driving on grade-separated highways.
In the past, reliable information on the relationship between individual vehicles’ annual
mileage and crashes was unavailable. Most insurers collect only limited and self-reported
mileage data, which vehicle owners often understate to qualify for lower rates. Other data
are highly aggregate, based on total vehicle travel and crashes in a state. However, in the
Vancouver, British Columbia region, mileage readings collected during emission checks
were matched with individual vehicles’ insurance claim records for more than 500,000
vehicle-years, providing reliable data.
3
Figure 4 illustrates the distribution of annual
mileage categories (mileage refers to annual vehicle-kilometers in this context).
2
For example, if you reduce your mileage by 10% you would expect a 10% reduction in your crash risk. If
you did not reduce your mileage but all other motorists reduced their mileage by 10% you could expect a
7% reduction in crash risk, since 70% of your crashes involve other vehicles. If you and all other motorists
reduce mileage by 10% you could expect a total 17% reduction in crash risk.
3
For more information on this data set see, Distance-Based Vehicle Insurance Feasibility, Costs and
Benefits (www.vtpi.org/dbvi_com.pdf).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
6
Figure 4 Distribution of Annual Vehicle Mileage
0
50,000
100,000
150,000
200,000
<
5
,0
0
0
5
,0
0
0
-
9
,9
9
9
1
0
,0
0
0
-
1
4
,9
9
9
1
5
,0
0
0
-
1
9
,9
9
9
2
0
,0
0
0
-
2
4
,9
9
9
2
5
,0
0
0
-
2
9
,9
9
9
3
0
,0
0
0
-
3
4
,9
9
9
3
5
,0
0
0
-
3
9
,9
9
9
4
0
,0
0
0
-
4
4
,9
9
9
4
5
,0
0
0
-
4
9
,9
9
9
Annual Vehicle Kilometres
N
u
m
b
e
r
o
f
V
e
h
i
c
l
e
s
This figure shows the distribution of annual vehicle-kilometres in the database.
Figure 5 illustrates the crash rates by annual vehicle mileage for all records in aggregate.
Figure 5 Crash Rates by Annual Vehicle Mileage
4
0.00
0.02
0.04
0.06
0.08
0.10
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
Annual Vehicle Kilometres (1,000s)
C
r
a
s
h
-
R
e
l
a
t
e
d
C
l
a
i
m
s
P
e
r
Y
e
a
r
Total
Non-Culpable
Culpable
Casualty
Annual crashes tend to increase with annual kilometres at the aggregate level.
Figure 6 shows crash rates by major category. Figure 7 illustrates crash rates for
individual “Low-Risk” categories (vehicles with more than eight continuous years
without a culpable claim). Annual crash rates tend to increase with annual mileage.
Because of the offsetting factors described above that result in relatively low per-mile
crash rates for high annual mileage vehicles, and relatively high per-mile crash rates for
low annual mileage vehicles, the relationship between annual mileage and annual crashes
for individual vehicles is probably stronger than indicated by this aggregate data.
4
British Columbia mileage and crash data.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
7
Figure 6 Crashes Per Year By Major Category
0.00
0.05
0.10
0.15
0.20
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
Annual Kilometer Category (1,000s)
C
r
a
s
h
-
R
e
l
a
t
e
d
C
l
a
i
m
s
P
e
r
Y
e
a
r
Overall Average
Low-Risk
Non-RoadStar
Pleasure Only
To/From Work
Business
Urban Core
Urban Fringe
Other Areas
All categories show a positive relationship between crashes and vehicle travel.
These graphs and other analysis described in the comprehensive technical report show a
strong positive relationship between annual vehicle travel and crashes in virtually all
price categories. This indicates that distance-based pricing increases actuarial accuracy
(i.e., makes premiums better reflect an individual vehicle’s claim costs).
Figure 7 Crashes Per Year By Category, Low-Risk Vehicles
0.00
0.01
0.02
0.03
0.04
0.05
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
Annual Kilometer Category (1,000s)
C
r
a
s
h
-
R
e
l
a
t
e
d
C
l
a
i
m
s
P
e
r
Y
e
a
r
Average
Pleasure, Core
Pleasure, Fringe
Pleasure, Other
To Work, Core
To Work, Fringe
To Work, Other
Business, Core
Business, Fringe
Business, Other
This figure shows that crash rates increase with annual mileage within price categories.
The data show that causality crashes (which involve an injury or death) and
comprehensive claims (which involve vandalism, theft, weather damage and glass
damage) also increase with annual vehicle mileage (Figure 8). This indicates that these
types of vehicle insurance require distanced-based pricing to be actuarially accurate.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
8
Figure 8 Comprehensive and Casualty Claims
20%
60%
100%
140%
180%
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
3
5
-
<
4
0
Annual Kilometre Category
C
r
a
s
h
R
a
t
e
s
R
e
l
a
t
i
v
e
t
o
C
l
a
s
s
A
v
e
r
a
g
e
Total Claims
Casualty Claims
Comprehensive Clai ms
This figure indicates that all types of crashes and claims tend to increase with annual vehicle mileage.
Because crashes and claims increase with mileage but premiums do not, motorists who
drive less than average tend to overpay their true insurance costs, while motorists who
drive more than average overpay within their rate category (i.e., motorists with the same
risk ratings who pay the same size premiums for a given level of insurance coverage), as
illustrated in figure 9.
Figure 9 Over- and Underpayment Relative to Rate Category Average
-$300
-$200
-$100
$0
$100
$200
$300
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
3
5
-
<
4
0
Annual Kilometre Category
A
n
n
u
a
l
O
v
e
r
-
o
r
U
n
d
e
r
-
P
a
y
m
e
n
t
This figure illustrates the degree to which vehicles over- or under-pay their true insurance costs
if pricing does not incorporate annual mileage.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
9
Subsequent research provides further evidence of the positive relationship between
mileage and crashes. Using Progressive Insurance Corporation data, Bordoff and Noel
(2008), found a strong positive relationship between mileage and claims. Ferreira and
Minike (2010) used mileage and insurance claim data matched for individual vehicles
totaling 2.8 million vehicle-years. Their analysis found a significant correlation between
miles driven and risk, and confirms that mileage is an accurate predictor of risk,
particularly when normalized for other rating factors. Overall, these studies confirm the
actuarial soundness of PAYD pricing.
Mileage - Crash Relationship Summary
The data show that crash rates increase with annual mileage in virtually all categories.
Mileage is not the only risk factor. It is not necessarily the most important risk factor. But
it clearly has a substantial impact. As a result, within existing rate categories lower
mileage motorists overpay and higher mileage motorists underpay their insurance costs.
A critical question with regard to distance-based insurance is whether mileage reductions
produce comparable reductions in crashes and claims. If not, insurers could face losses,
since revenues decline more than costs. For example, if distance-based pricing causes a
10% reduction in mileage and premium revenue but only a 5% reduction in crashes and
claims, insurers would be financially worse off. This could occur if lower-risk driving is
more price sensitive than higher-risk driving. Some data described above suggest that this
could occur, since marginal per-mile crash rates are nearly flat at very high-mileages,
which implies that the last few thousand miles driven each year by a high-mileage vehicle
has zero risk (in some cases it even suggests that increased mileage reduces crash risk).
However, this reflects crash rates between different vehicles, not the result of mileage
changes by individual vehicles.
All available data indicate that mileage reductions usually do reduce crashes and claims,
and normally provide a proportionally greater reduction in total crash costs and claims
by reducing both the risk of causing a crash and exposure to risks caused by another
motorist. Available evidence indicates that a 10% reduction in mileage typically reduces
total insurance claims by 14% to 18%, although a single insurer with a minor share of the
vehicle insurance market does not capture all of these savings.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
10
Distance-Based Insurance Pricing Options
This section describes four distance-based insurance pricing strategies.
1. Mileage Rate Factor (MRF) (Hundstad, Bernstein and Turem 1994)
Vehicle insurance could become more distance-based by incorporating motorists’
estimates of their annual mileage as a rating factor into the existing price structure. This
would be relatively easy to implement. However, motorists cannot predict with certainty
how much they will drive in the future and tend to underestimate their annual mileage if
they have a financial incentive. As a result, Mileage Rate Factor is inaccurate and can
only apply a small portion of the actuarially justified weight on mileage.
2. Pay-at-the-Pump (PATP) (Sugarman 1993; Wenzel 1994)
Pay-at-the-Pump uses a 25-50¢ per gallon surcharge on gasoline sales to fund basic
vehicle insurance. Table 2 summarizes the risks that are covered. PATP overcharges low-
risk drivers with fuel-inefficient vehicles and undercharges high-risk drivers with fuel-
efficient vehicles relative to their true insurance costs. To address this, most PATP
proposals include additional surcharges on vehicle registrations, drivers licenses and
traffic citations that reflect risk factors.
Table 2 Pay-at-the-Pump Coverage
Typically Covered Typically Not Covered
? Basic liability for collisions by
gasoline-powered vehicles that occur
within the jurisdiction that has
PATP.
? Extended liability.
? Collision
? Comprehensive
? Out-of-jurisdiction travel.
? Vehicles using fuel other than gasoline.
PATP only covers about a third of total insurance premiums; the rest continue to be fixed
price. As a result, it only provides modest reductions in vehicle travel and modest overall
benefits. PATP can cause significant revenue “leakage” from cross-borders and illegal
fuel purchases (5-10% of vehicle mileage could be insured by PATP without paying the
surcharge if a typical state or province implements PATP by itself). This creates a new
inequity, since motorists who pay the surcharge would subsidize the insurance costs of
motorists who avoid it.
PATP provides universal liability coverage for gasoline vehicles, which is attractive in
jurisdictions with high uninsured driving rates. However, losses through cross-border and
illegal fuel purchases would probably more than offset the increased cost recovery of
uninsured driving. Other methods can effectively minimize uninsured driving, such as
integrating vehicle insurance and licensing transactions (vehicle owners must pay for
insurance to obtain license tabs), which has reduced uninsured driving to less than 1% in
some jurisdictions.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
11
3. Per-Mile Premiums (PMP) (Butler 1993; Baker and Barrett 1998; Edlin 2003; Bordoff
and Noel 2008; Ferreira and Minike 2010)
This means that vehicle insurance is sold by the vehicle-mile (or kilometer) rather than
the vehicle-year.
5
Other rating factors are incorporated into this price unit, so higher-risk
drivers pay more per mile than lower-risk vehicles. For example, a $500 annual premium
becomes 4¢ per mile, and a $1,000 annual premium becomes 8¢ per mile.
Motorists would prepay for the miles/minutes they expect to drive during the term, either
in a lump sum or in several payments. For example, some motorists might pay for 12,500
miles at the start of the term, while others might pay for just 5,000 miles at first and make
additional payments as needed. The total premium is calculated at the end of the term
based on recorded mileage. Vehicle owners are credited for unused miles/minutes or pay
any outstanding balance. There are three possible approaches to coverage:
A. Coverage only on prepaid miles/minutes. For example, if a vehicle owner pays for 5,000
miles, they have no coverage at 5,001 miles. This is the simplest approach and is appropriate
for optional coverage, but would result in uninsured driving if applied to mandatory coverage.
B. Coverage regardless of prepayment. Once a driver makes a minimum payment they have
coverage for the policy term (usually a year), and pay for any outstanding miles at the end of
the term. For example, at the start of the term a motorist might pay for 5,000 miles of
coverage but drive 15,000 miles. At the end of the term they would need to pay for the
outstanding 10,000 miles driven in order to reinsure and reregister the vehicle. A problem
with this approach is that motorists could avoid full payment by selling a vehicle outside the
jurisdiction or scrapped it at the end of their term.
C. Coverage regardless of prepayment, with late payment penalties. This combines options A
and B. Basic liability coverage would be provided for all travel during the policy term, but
claims on unpaid miles or minutes would have financial penalties. For example, deductibles
could double for claims that occur past the prepaid number of miles. This would give
motorists an incentive to prepay, and would reduce insurance company’s losses, since drivers
who intend to avoid full payment would be stealing low value coverage.
Per-Mile Premiums requires odometer auditing to collect accurate vehicle-mileage data.
Odometer audits would be performed when a vehicle’s insurance is renewed, in most
cases once a year. Audits involve these steps:
1. Check speedometer and instrument cluster for indications of tampering.
2. Record tire size and check that it is within the specified range.
3. Attach a small seal to the ends of mechanical odometer cables to indicate if it has been
removed. This is unnecessary on most newer vehicles with electronic speedometers.
4. Check odometer accuracy and calibrate with a dynamometer (this is optional and could be
performed on a random basis).
5. Record odometer reading and forward results to the vehicle licensing agency.
5
A variation is to price by the vehicle-minute using an electronic instrument to measure engine operation.
This concept is described in the comprehensive technical report.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
12
Audits take 5-10 minutes and less if performed with other vehicle servicing, estimated to
average $5-10 per vehicle-year. Governments could certify auditors and incorporate
odometer data into their vehicle registration database, or insurance companies could
establish their own odometer auditor networks. Vehicle maintenance shops, emission
inspection stations and some insurance brokers are likely to be certified.
There are concerns that odometer fraud could be a problem, but most tampering can be
detected during audits and crash investigations, and fraud would void coverage.
Odometers are increasingly tamper-resistant. 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. Audits would provide
additional benefits, including accurate mileage data for used-vehicle buyers, and allows
other charges, such as registration fees, to become distance-based at minimal extra cost.
Per-Mile Premiums could be implemented as a consumer option (NOW 1998; Oregon
HB 3871). Motorists would choose between vehicle-year and vehicle-mile premiums, just
as consumers can now choose their telephone service rates. Optional odometer-based
PAYD would probably attract 20-40% of total policies, representing a significant portion
of motorists who expect to drive less than 80% of average annual mileage in their rate
class, representing 10-20% of total mileage. Participation should increase over time as
fixed-rate premiums increase, eventually causing the market to shift to PAYD pricing.
6
Figure 10 illustrates the financial impacts of Per-Mile Premiums on different types of
motorists. A low-cost, low-mile vehicle owned by a low-income motorist might save
$225, an 8.4% reduction in total vehicle expenses. An average motorist saves $64
annually in insurance costs if vehicle travel declines 10% as expected. A high-mileage
motorist pays $331 more per year, a 4.7% increase in total vehicle expenses.
Figure 10 Current and Per-Mile Premiums Annual Costs Compared
$0
$2,000
$4,000
$6,000
$8,000
C
u
r
r
e
n
t
S
a
m
e
M
i
l
e
a
g
e
R
e
d
u
c
e
d
M
i
l
e
a
g
e
C
u
r
r
e
n
t
S
a
m
e
M
i
l
e
a
g
e
R
e
d
u
c
e
d
M
i
l
e
a
g
e
C
u
r
r
e
n
t
S
a
m
e
M
i
l
e
a
g
e
R
e
d
u
c
e
d
M
i
l
e
a
g
e
A
n
n
u
a
l
V
e
h
i
c
l
e
E
x
p
e
n
s
e
s
Insurance
Variable
Fixed
Low Average
High
This compares costs for Low, Average and High mileage vehicles. “Current” refers to vehicles
with fixed-price insurance. “Same Mileage” refers to vehicles with Usage-Based Premiums that
do not reduce annual mileage. “Reduced Mileage” assumes a 10% reduction.
6
The first insurers to offer distance-based pricing are likely to attract many new customers.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
13
4. GPS-Based Pricing (Bomberg, Baker and Goodin 2009)
This system prices insurance based on when and where driving occurs, using a GPS
(Global Positioning System) transponder installed in each vehicle. It can incorporate
virtually any rating factor related to driver, vehicle, time and location of vehicle travel.
For example, an average motorist might pay 7¢ per minute for urban-peak driving, 5¢ for
urban-off-peak driving, and 3¢ per minute for driving in rural areas. A lower-risk
motorist pays less and a higher-risk motorist pays more.
This system typically adds $150 or more in annual costs for equipment, billing and
royalties.
7
Privacy is a concern, although this can be address by controlling how vehicle
location data are processed and stored.
In 1998 the Progressive insurance company introduced a pilot program of this system call
Autograph coverage.
8
It has a $15 per month equipment fee, which allows participants to
obtain other GPS services (panic button, roadside assistance, directional assistance, theft
recovery, remote power door unlock, etc.) at a significant discount. Participants reduced
their mileage more than 13% and saved more than 25% on average compared with
conventional insurance pricing.
GPS-Based Pricing can attract motorists who drive low-mileage vehicles or want other
GPS-based services, and who are not particularly concerned about loss of privacy
(predicted to be 5-10% of current policies). This should increase somewhat over the next
decade as more vehicles are manufactured with GPS transponders, but penetration would
probably stay under 20% due to additional billing costs and privacy concerns.
Summary
The table below summarizes the pricing options evaluated in this report.
Table 3 Summary of Distance-Based Pricing Options
Name Description
MRF Mileage Rate Factor is incorporated into premiums.
PATP
Pay-at-the-Pump uses a fuel surcharge to provide basic insurance coverage
for gasoline-powered vehicles.
Per-Mile, Mandatory All vehicle insurance is priced by the mile or kilometer.
Per-Mile Ins. & Reg. All vehicle insurance and registration fees are priced by the mile or km.
Per-Mile, Optional Motorists may choose between vehicle-year or vehicle-mile premiums.
GPS-Based Pricing
Motorists may choose to purchase insurance based on when and where they
drive using a GPS transponder installed in their vehicle.
This table summarizes the pricing options evaluated in the next section of this report.
7
The Progressive Insurance Company’s U.S. patent number 5,797,134 covers this technology.
8
Progressive Autograph, Progressive Insurance, (www.progressive.com). This program is being studied by
the USEPA (www.epa.gov/projectxl/progressive/index.htm).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
14
Comparison of Distance-Based Insurance Options
This section compares distance-based pricing options by various criteria.
9
1. Actuarial Accuracy
Mileage Rate Factor is constrained by the weight that can be placed on mileage before
self-reported estimates of future travel are unacceptably understated. PATP is constrained
because it uses fuel consumption as a surrogate for vehicle travel and then incorporates
rating factors through fixed (not distance-related) surcharges on vehicle registration and
drivers licenses, resulting in a trade-off between actuarial accuracy and distance-related
pricing. Per-Mile Premiums can incorporate all existing rating factors, significantly
improving actuarial accuracy. GPS-Based Pricing can incorporate existing rating factors
plus travel time and location, and so is the most actuarially accurate pricing option.
2. Implementation Costs
Mileage Rate Factor using self-reported estimates of future travel has the lowest
implementation costs. PATP has moderate to large transition costs, since it requires
reorganizing the entire vehicle insurance system. It could reduce administrative costs for
motorists who only purchase basic insurance, but most drivers would still need to
purchase other coverages, so overall savings would be small.
Per-Mile Premiums require a new rate plan and an odometer auditing system. Most audits
could be performed during other scheduled servicing, with an estimated incremental cost
averaging $6 per vehicle-year. GPS-Based Pricing requires a GPS transponder installed
in each vehicle, a tracking and billing system, plus royalties to use the technology. This is
estimated to cost at least $150 per vehicle-year for most vehicles.
3. Travel Impacts
Table 4 indicates the magnitude of these per-mile costs, and the effects on vehicle travel,
based on standard elasticity values. Figure 11 illustrates the travel reductions.
Table 4 Travel Reduction Impacts
MRF
PATP
Per-Mile
Mandatory
Per-Mile
Ins. & Reg.
Per-Mile
Optional
GPS-
Based
Market penetration 100% 90% 100% 100% 50% 10%
Price increase per mile 0.7¢ 1.4¢ 5.6¢ 6.8¢ 5.6¢ 5.6¢
Reduction per participating vehicle 1.0% 5.0% 10% 12% 13% 15%
Total vehicle travel reduction 1.0% 4.5% 10% 12% 3.7% 0.8%
This table compares the travel impacts of the various distance-based pricing options.
9
Most impacts and benefits described in this section could increase about 10% if vehicle registration fees
also become distance-based.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
15
Figure 11 Distance-Based Insurance Impacts On Vehicle Travel
0%
5%
10%
15%
MRF PATP Per-Mile,
Manditory
Per-Mile Ins.
& Reg.
Per-Mile,
Optional
GPS-Based
Pricing
T
r
a
v
e
l
R
e
d
u
c
t
i
o
n
Per Paricipating Vehicle
Total Reduction
This figure compares travel impacts. Mileage reductions per participating vehicle depend on the
size of the per-mile fee. Strategies with high implementation costs have low penetration rates and
are only chosen by low mileage vehicles, so their total travel reductions are relatively small.
Distance-based insurance could increase vehicle ownership since it reduces fixed costs,
but this is expected to be small (about 1%) and would add little additional vehicle travel.
Most additional vehicles would be a household’s second vehicle, such as an old truck or a
collector car, which would substitute for, rather than add to, existing travel. Only drivers
who purchase a first vehicle due to low fixed insurance costs are likely to drive more, and
the annual mileage will be quite low; otherwise they would have no savings.
Some people suggest that Mileage Rate Factor and Per-Mile Premiums would have little
effect on travel behavior because there would usually be several months lag between a
reduction in mileage and consumers’ financial savings, but this probably has a minor
effect. For example, there is no evidence that households that heat with oil and so pay
infrequently are less motivated to conserve heat (e.g., insulate, close doors and windows)
than households that heat with electricity or gas and pay more frequently.
4. Road Safety
As described earlier in this report, each 1.0% reduction in vehicle mileage reduces total
vehicle crash costs by 1.4% to 1.8%. PATP may provide somewhat smaller reductions in
crash damages if it causes a shift to vehicles with less crash protection, although this
impact is uncertain. Per-Mile Premiums give higher risk motorists an extra incentive to
reduce their driving, and GPS-Based Pricing gives motorists an extra incentive to avoid
higher-risk driving conditions, increasing their crash reductions (Bolderdijka, et al. 2010).
The table below compares predicted crash reductions for the pricing options.
Table 5 Estimate of Road Safety Benefits
MRF
PATP
Per-Mile
Mandatory
Per-Mile
Ins. & Reg.
Per-Mile
Optional
GPS-
Based
Total VMT reduction 1.0% 4.5% 10% 12% 3.7% 0.8%
% Crash reduction per % VMT red. 1.2 1.1 1.4 1.4 1.4 1.6
Total crash reduction 1.2% 5.0% 14.0% 16.8% 5.2% 1.2%
This table summarizes the safety benefits of distance-based insurance.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
16
5. Energy and Emission
Mileage Rate Factor reduces energy consumption and emissions by about 1%. PATP
reduces fuel consumption and CO
2
emissions by 13.5%. Per-Mile Premiums reduce
energy consumption and emissions by 10%, and 12% if registration fees are also
distance-based. GPS-Based Pricing provides an extra incentive to avoid congested
conditions, therefore providing extra energy savings and emission reduction benefits per
participating vehicle. However, its total impacts are small due to its limited penetration.
6. Congestion and Facility Cost Savings
Reductions in vehicle travel tend to reduce traffic congestion, and road and parking
facility costs. Mileage Rate Factor causes small travel reductions and therefore provides
little benefit. PATP causes modest travel reductions and therefore provides modest
benefits. Mandatory Per-Mile Premiums provide the greatest travel reduction and
therefore the greatest benefits, particularly if registration fees are also distance-based.
GPS-Based Pricing provides an extra incentive to avoid congested conditions, but its total
impacts are small due to its limited penetration.
7. Consumer Impact
Distance-based insurance gives motorists a new opportunity to save money. Average
motorists who continue their current driving patterns pay the same as they do now (plus
any implementation costs), while those who drive less save. Mileage reductions represent
consumer benefits; low value vehicle travel that motorists forego in exchange for
financial savings. The greater the travel reduction, the greater the consumer surplus gains.
Figure 12 illustrates the increased variable costs from different distance-based insurance
pricing options. Figure 13 illustrates impacts on total vehicle costs, which are modest
because insurance is a minor portion of total vehicle costs.
Figure 12 Impacts On Variable Vehicle Costs
$0.00
$0.04
$0.08
$0.12
$0.16
$0.20
Mileage Rating
Factor
PATP Per-Mile
Premiums
GPS-Based
Pricing
V
a
r
i
a
b
l
e
C
o
s
t
p
e
r
V
e
h
i
c
l
e
-
M
i
l
e
Prorated Registration Fees
Insurance Charge
Current Variable Costs
This figure compares how each option increases per mile (variable) vehicle costs.
Only about 18% of vehicles are driven more than 15,000 miles annually, indicating that
less than one in five drivers would pay significantly more (i.e., over 10%) with distance-
based premiums. Optional distance-based pricing provides direct consumer benefits since
motorists would only choose it if they considered themselves better off overall.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
17
Figure 13 Comparison of Total Costs By Annual Mileage
$0
$2,000
$4,000
$6,000
$8,000
0 5,000 10,000 15,000 20,000 25,000
Annual Vehicle Mileage
T
o
t
a
l
A
n
n
u
a
l
E
x
p
e
n
d
i
t
u
r
e
s
Current Pricing
Mileage Rate Factor
Pay-at-the-Pump
Per-Mile Premiums
Per-Mile Ins. & Reg.
GPS-Based Pricing
This graph illustrates the effects different pricing options have on total vehicle costs.
8. Equity
Distance-based insurance helps achieve equity by more accurately reflecting crash costs
(horizontal equity) and providing savings and increased choice to lower income
households (vertical equity). Mileage Rate Factor slightly improves equity. PATP
replaces current inequities with new inequities: overcharging lower-risk motorists with
fuel inefficient vehicles who pay the premium, and undercharging higher-risk motorists
with fuel efficient vehicles, and motorists who avoid paying the surcharge. Per-Mile
Premiums provides the greatest overall changes in costs and so provides the greatest
overall equity benefits. GPS-Based Pricing can be most actuarially accurate but its high
implementation costs limit its availability, particularly to lower-income motorists.
9. Affordability
Distance-based insurance increases affordability by allowing consumers to purchase just
as much accident risk as they can afford (Litman 2004a; Brobeck and Hunter 2012).
Mileage Rate Factor provides minimal affordability benefits. PATP provides moderate
affordability benefits. Per-Mile Premiums offer the greatest affordability benefits because
they provide the greatest potential savings. GPS-Based Pricing has high implementation
costs, and so cannot increase affordability for most motorists.
10. Economic Efficiency, Productivity and Development
Distance-based insurance increases economic efficiency by making prices better reflect
marginal costs, and increases productivity by reducing externalities. Mileage Rate Factor
provides minimal benefits. PATP is not actuarially accurate, provides modest externality
reductions and can impose large economic costs on a jurisdiction by increasing cross-
border and illegal fuel sales. Per-Mile Premiums provide the greatest economic benefits
by more accurately reflecting costs and providing large externality reductions,
particularly if registration fees are also distance-based. GPS-Based Pricing has minimal
efficiency benefits due to high costs and modest market penetration.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
18
11. Public Acceptability
There is likely to be strong support for optional distance-based insurance since it
increases consumer choice and gives motorists a new opportunity to save money.
Legislation supporting optional distance-based insurance (Oregon HB 3871) was
endorsed by the National Association of Independent Insurers, regional governments, the
American Automobile Association, the Oregon Consumer League, environmental
organizations, citizen transportation reform groups and the Interfaith Global Warming
Campaign (Hagerbaumer 2001).
Public response to mandatory distance-based insurance is mixed. Citizens generally
support reforms that increase fairness and offer cost savings, and help solve specific
problems, but are skeptical if it may raise costs or burden disadvantaged groups. Citizens
may be uncomfortable with Mileage Rate Factor that relies on unverified mileage data.
PATP appears to be the least popular option because it is perceived as a new fuel tax.
Many objections to Per-Mile Premiums reflect misunderstanding of the concept and
could be addressed by education and program design.
Consumers sometimes prefer the predictability and convenience of fixed prices, such as
all-you-can-eat restaurants and flat-rate telephone service, but this preference is generally
weak. Fixed-rate pricing is relatively uncommon in competitive markets, and some
markets are shifting toward more variable pricing. For example, water utilities increasingly
meter consumption, and electric rates are increasingly time-based. There is no evidence
that consumers have a strong preference for fixed-priced insurance. Given the choice, most
motorists who expect to save money would probably choose distance-based pricing.
Summary
Table 6 summarizes the rating of each price option according to the twelve criteria.
Table 6 Impact Rating Summary
MRF
PATP
Per-Mile
Mandatory
Per-Mile Ins.
& Reg.
Per-Mile
Optional
GPS-
Based
Actuarial Accuracy 1 0 2.5 2.5 2.5 3
Implementation Costs -1 -3 -1.5 -1.5 -1 -3
Fairness 1 0 2.5 2.5 2.5 3
Progressive 1 -1 2.8 3 3 1
Consumer Impacts 1 2 3 3 3 1
Public Acceptability 1 0 2 2 3 1
Travel Impacts 1 2 2.8 3 2 1
Road Safety 1 2 2.8 3 2 1
Congestion Reduction 1 2 2.8 3 2 1
Energy/Emissions 1 3 2.8 3 2 1
Economic Development 1 -2 2.8 3 2 1
Totals 9 5 25.3 26.5 23 11
Rating from -3 (high cost/undesirable) to 3 (highly beneficial/desirable).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
19
Mileage Rate Factor ranks high only in implementation cost. PATP ranks high in energy
conservation/emission reductions, and medium in several categories due to its moderate
travel reduction. Mandatory Per-Mile Premiums rank high in most categories because
they cause a large cost shift and a large reduction in total vehicle travel, which increase
further if registration fees are also distance-based. Optional Per-Mile Premiums rates
lower in some categories due to its lower market penetration, resulting in smaller total
vehicle travel reductions and associated benefits. GPS-Based Pricing can incorporate the
most rating factors and so is most actuarially accurate, but its market penetration is
limited, resulting in a relatively small reduction in total vehicle travel, and little increase
in affordability. As a result its overall ranking is relatively low.
Figure 14 illustrates a benefit-cost analysis results. All six provide benefits that exceed
incremental costs. Mileage Rate Factor has minimal implementation costs but vehicle
travel impacts and overall benefits are small. PATP provides moderate benefits and high
costs due to fuel tax revenue losses, and so has the lowest Benefit/Cost ratio. Mandatory
Per-Mile Premiums have large total benefits, which increase if registration fees are also
distance-based. Optional Per-Mile Premiums cause smaller total vehicle travel reductions
and so benefits are modest. GPS-Based Pricing has minimal penetration and the highest
per-vehicle implementation costs, and so has the smallest net benefits.
Figure 14 Summary of Total Benefits and Costs
($50)
$0
$50
$100
$150
$200
$250
$300
$350
M
R
F
P
A
T
P
P
e
r
-
M
i
l
e
M
a
n
d
a
t
o
r
y
P
e
r
-
M
i
l
e
I
n
s
.
&
R
e
g
P
e
r
-
M
i
l
e
O
p
t
i
o
n
a
l
G
P
S
-
B
a
s
e
d
P
r
i
c
i
n
g
P
e
r
V
e
h
i
c
l
e
A
n
n
u
a
l
B
e
n
e
f
i
t
s
&
C
o
s
t
s
Traffic safety benefits
Congestion reduction
Road and parking facility
cost savings
Consumer surplus
Pollution reduction benefits
Transition costs
Equipment/audit costs
Fuel tax/surcharge
revenue losses
This figure illustrates monetized benefits (above the line) and costs (below the line).
Both mandatory and optional Per-Mile Premiums have Benefit/Cost ratios that exceed 25.
Even if costs were far greater than predicted (for example, if odometer auditing cost $20-
40 annually per vehicle, rather than the $5-7 that is predicted), each of the five benefits
would individually provide net benefits. This indicates that even under a worst-case
scenario, with much greater costs and lower benefits than predicted, implementation of
Per-Mile Premiums is still cost effective.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
20
Consumer Impacts
Distance-based insurance pricing gives motorists a new opportunity to save money if they
reduce their mileage. People sometimes misunderstand the source of these savings; they
assume that the savings represent cost shifts, so each dollar of savings to motorists who
reduce their mileage requires an additional dollar paid by higher mileage motorists. This
is untrue. Much of the savings reflect true cost reductions provided by reductions in
crashes and therefore insurance claim costs. With current insurance pricing, motorists
who reduce their mileage provide savings that benefit their insurance company or all
motorists in their rate class, with distance-based insurance individual motorists receive
the savings that result when they reduce their mileage.
Since DBVI offers a new opportunity for savings, the mileage reductions provide
consumer benefits. For example, if a motorist who shifts to distance-based insurance with
10¢ per vehicle-mile premiums responds by reducing their vehicle travel 10%, or 1,200
annual vehicle-miles, as models predict, we can surmise that these miles foregone have
an incremental value to that motorist ranging between 0¢ and 10¢. If those miles were
worth less than 0¢ (they provide no incremental consumer benefit), they would not be
driven in any case. If they consider those miles worth 1-9¢, the additional 10¢ per mile
savings will convince them to give it up, they would rather have the money. If the
additional mile is worth more than 10¢ per mile, a 10¢ per mile savings is inadequate to
convince motorists to forego that mile, they will continue driving. Of the 1,200 miles
foregone, we can assume the average consumer surplus (net consumer benefit) is the mid-
point of this range, that is, 5¢ per vehicle-mile. Thus, we can calculate that miles
foregone by a 10¢ per vehicle-mile premium have an average consumer surplus value of
5¢, or a $60 overall increase in consumer surplus (1,200 miles times $0.05 per mile).
Under most scenarios, distance-based insurance would be a consumer option, so
individual motorists could choose the pricing structure that best meets their individual
needs just as consumers can choose various price structures for telephone and internet
services (per minute, a bundle of minutes, or unlimited usage). This reflects the principle
of consumer sovereignty, the idea that consumers benefit from having diverse goods
(including different types, qualities, and price options) from which they can choose the
combination that best meets their needs.
To the degree that lower-mileage motorists overpay their true insurance costs and cross-
subsidize higher mileage motorists, distance-based pricing may eventually increase
premiums for conventional (flat-rate) policies, as more lower-annual-mile motorists shift
to distance-based policies. Such increases should be gradual and predictable, with a few
percent of motorists shifting to the new price structure each year, forcing insurers to raise
flat-rate premiums a few percent a year. This will raise the annual mileage point at which
motorists consider distance-based insurance attractive. These price increases reflect the
actual costs of insuring higher-annual-mileage vehicles and so reflect increases in
economic efficiency and equity. Bordoff and Noel (2008) estimate that in the U.S.,
lower-annual-mileage motorists overpay an average of $318 annually compared with
what is actuarially accurate, and PAYD would provide direct net savings to about two-
thirds of all motorists.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
21
Responses to Concerns About Per-Mile Insurance
This section discusses concerns that have been raised about distance-based pricing.
Insurance pricing already incorporates mileage.
Some insurance companies incorporate mileage-related rate factors such as commute distance or
estimated annual mileage, but none begins to approach actuarially accurate, marginal pricing, so
they fail to give motorists accurate price signals.
Mileage is less important in predicting crashes than other rating factors.
Insurance industry claims that annual mileage is not a significant risk factor based on inaccurate,
self-reported data. New research based on independently-collected mileage data shows a strong
relationship between mileage and crashes. Whether mileage is more or less important than other
risk factors is irrelevant for DBVI pricing that incorporates other rating factors. Although it
would not be actuarially accurate to use mileage instead of other rating factors (for example, to
charge all motorists the same 6¢ per mile for insurance), actuarial accuracy increases significantly
if mileage is added to other rating factors, so for example, a lower-risk motorist pays 3¢ per mile
and a higher risk motorist pays 12¢ per mile).
Travel foregone could be lower risk than average, resulting in little crash reduction, and
less insurance cost savings than reduced premium revenue.
This concern is technically valid, although there is no evidence that it is true. Available evidence
indicates that DBVI reduces both high and low risk travel, and broad vehicle travel reductions
result in proportionally greater crash reductions and insurance savings. Additional research and
pilot projects that test the effects of distance-based pricing could address this concern.
DBVI pricing increases costs to low-income motorists.
DBVI provides significant savings and benefits to most lower-income motorists, including those
who currently drive less than average, those who drive somewhat more than average but will
reduce their mileage in response to this price incentive and so save money, those who currently
drive uninsured because they cannot afford insurance, and those who currently cannot afford to
own an automobile due to high insurance costs until DBVI becomes available. Butler (2000)
describes how fixed insurance pricing creates a spiral of rising premiums and uninsured driving
rates that harm low-income communities.
DBVI pricing unfairly increases costs to high-mileage drivers.
DBVI increases premiums for motorists who drive significantly more than average within their
rate class. This is justified on actuarial grounds, and so increases fairness. Most motorists save
money and benefit overall, particularly lower-income motorists, who tend to drive less than
average within their rate groups.
DBVI pricing unfairly increases costs to rural residents.
Since territory is a rate factor, only rural motorists who drive significantly more than the average
among rural residents would pay more. For example, motorists average 12,000 annual miles but
rural motorists average 15,000, so rural residents who drive 14,000 annual miles would save
money—although this is more than the state average—because it is less than the rural average.
Automobile insurance reform should focus on equity, affordability and safety.
DBVI pricing helps achieve all of these goals. It increases equity by making premiums more
actuarially accurate. It makes vehicle ownership more affordable and provides financial savings,
particularly for lower income motorists. It also significantly increases road safety.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
22
There are other ways to achieve safety, mobility, energy conservation and environmental goals.
It is unnecessary to choose between DBVI pricing and other strategies. Distance-based pricing
complements other strategies. Because of its multiple benefits, DBVI insurance can be one of the
most cost-effective ways to achieve these objectives.
People need their cars too much to give them up. There will be no travel reduction.
DBVI is not expected to cause people to give up cars. There is extensive evidence vehicle
operating costs affect vehicle travel activity. A 5-15% mileage reduction is projected based on
standard motorist price responses.
Consumers will not accept this change.
Market surveys and pilot projects indicate significant consumer demand for distance-based
pricing. A broad range of interest groups support DBVI pricing. Support should increase as
consumers and citizens learn more about this concept.
Odometer fraud will be a major problem.
Although some fraud may occur, it should be minor overall, with fraud rates comparable to other
common consumer transactions, and far lower than with current insurance pricing based on self-
reported predictions of future mileage. Odometers are increasingly tamper resistant, regular
odometer audits should discourage tampering, and the financial incentive for fraud is relatively
low. Insurers’ financial exposure would be minimal since odometer fraud voids coverage.
It increases administrative costs to insurers and inconvenience vehicle owners.
Although any price change adds short-term transition costs, these are minor, and tiny compared
with total benefits. Odometer audits should cost $5-$15, and less if performed in conjunction with
scheduled maintenance such as an oil change or emission inspection.
This type of pricing has never been used before.
Some vehicle insurance is already distance-based: rates for fleets and commercial vehicle
coverage are often based on mileage. Several insurers now offer DBVI policies. There is nothing
unique about pricing based on use. Prices for most goods are based on some measure of
consumption, such as water and electric meters, and scales used to weigh food. Vehicle rentals
and leases incorporate odometer-based price components. Vehicle insurance is unusual for having
pricing that allows unlimited consumption (i.e., vehicle mileage).
DBVI pricing would be an invasion of privacy.
Odometer auditing does not identify when or where a vehicle has been driven, or provide any
other information that could be considered private. Odometer readings are already collected
during vehicle servicing, vehicle sales and crash investigations. Odometer readings are even sold
by private companies to used vehicle purchasers. Odometer auditing simply standardizes the
collection of this information. Odometer auditing would provide additional benefits. For example,
it would prevent odometer fraud by used vehicle sellers (since a reliable record of past odometer
readings would be easily available) and provide data useful for transport planning.
Some DBVI systems do track when and where a vehicle is driven, and so may raise legitimate
privacy concerns. However, this would be a consumer option, and these systems can be designed
with controls over how the vehicle location data are processed and stored, as with other personal
data such as telephone calls and credit card transactions. Many motorists already choose to collect
this information for security and auditing purposes.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
23
Table 2 Obstacles and Potential Solutions
Obstacle Potential Solutions
Misunderstandings. Many objections to DBVI pricing
reflect misunderstandings of the concept. Some people
believe it refers to Pay-At-The-Pump (insurance
coverage funded through a fuel sales surcharge), are
unaware of its full potential benefits, or have
exaggerated estimates of its costs.
Educate stakeholders (policy makers, insurance
professionals, insurance regulators, consumers) about
DBVI, including how it would be implemented, and its
real benefits and costs.
Uncertainty. Current rate structures are based on claim
cost data collected by the vehicle-year. Although there
is ample evidence that mileage is an important risk
factor, actuaries have insufficient data to know exactly
how to calculate mileage-based premiums.
Begin with a relatively small pilot project, using a basic
prorated premium (i.e., current annual premiums divided
by average annual mileage for each rate class), with an
extra 5-15% margin to account for uncertainty. Adjust
this rate as needed as the pilot project provides data.
Data accuracy. DBVI requires accurate mileage data.
Self-reported data is unreliable.
Mileage data can be collected in many ways. The
cheapest is for motorists to report odometer readings,
verified with occasional spot-checks. The most costly is
to install GPS transponders in each participating vehicle.
An intermediate approach, which may provide the
optimal balance between accuracy and cost, is to certify
businesses (emission stations, service stations, and
brokers) to perform odometer audits.
Exaggerated number of losers. Some people object to
DBVI because they believe it would harm many
groups, such as rural drivers (DBVI, as recommended
here, would only increase costs for rural motorists who
drive more than the average for rural motorists) or
businesses (premiums for business vehicles already
reflect their relatively high mileage).
Educate stakeholders about DBVI insurance real
distributional impacts. To the degree that it is effective at
reducing mileage and crash costs, most people should
benefit overall. Even high mileage drivers can benefit
overall if they prefer owning multiple vehicles, and due
to reduced exposure to traffic congestion, accident risk
and pollution emissions.
Regulatory constraints. Some insurance regulations
discourage pricing reforms. For example, regulators
often require insurers to provide data justifying rates,
and some prohibit insurers from offering multiple rate
structures. Regulations are complex and rate filings are
costly (often costing a million dollars or more in data
collection, analysis and paper works), which
discourages small, innovative pilot projects.
Educate insurance regulators concerning the merits of
DBVI with respect to insurance regulatory objectives.
Collect data showing the actuarial basis for DBVI. Work
with regulatory agencies to address specific obstacles to
innovation and small pilot projects. Identify jurisdictions
that have suitably supportive regulatory policies. Pass
legislation (as in Oregon and Texas) which specifically
allows DBVI insurance pricing.
Lack of incentive. Insurance companies currently
perceive little incentive to implement innovative
pricing options such as DBVI pricing.
Educate insurance company officials concerning
opportunities to profit from DBVI pricing (the first
companies to offer this product should attract significant
new business). Provide financial incentives, such as tax
breaks (as Oregon now does). Pass laws requiring
insurance companies to offer DBVI, at least as an option.
Fund DBVI research programs and pilot projects. Favor
insurance companies that offer DBVI pricing in
government contracts.
This table lists various obstacles to DBVI pricing, and potential solutions to them.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
24
Examples and Case Studies
MileMeter (www.milemeter.com)
MileMeter is a private insurance company which began selling PAYD insurance policies in Texas
in 2008. All policies are valid for the amount of miles purchased or a six (6) month period.
Policies are purchased by the Internet. Motorists report their odometer reading when they
purchase a policy. This information is cross-referenced with odometer readings from vehicle
emission, maintenance, and registration databases nationwide to insurance accuracy.
Coverbox (www.coverbox.co.uk/index.php)
Coverbox is an Internet-based brokerage firm that uses mileage recording device installed in
vehicles to calculate insurance and theft tracking. Policy mileage rates vary depending on when a
vehicle is driven, with off-peak, peak and super-peak. Motorists pay premiums based on their
projected future driving patterns. At the end of the policy term the rates are adjusted to reflect
actual driving during that period; motorists receive a rebate if their actual mileage is less than
projected or pay for any additional mileage charge needed. Several insurance companies
including Co-operative, Allianz and Equity Red Star offer Coverbox PAYD policies.
Real Insurance PAYD (www.payasyoudrive.com.au)
Starting in 2008, Real Insurance began offering Pay-As-You-Drive vehicle insurance in Australia.
Motorists report their odometer reading at the beginning of the policy term and purchase a certain
number of kilometers. Odometer readings are verified if there is a claim, giving motorists an
incentive to be accurate (false readings void coverage). Any unused kilometers are either
refunded if motorists cancel or don’t renew (upon verification of vehicle odometers if requested
by the company) or carried over to the next policy. If kilometers exceed prepayment the policy
only provides basic coverage (liability, fire and theft). Policy holders can easily purchase
additional kilometers at any time. This program was awarded Australia’s Cheapest Car Insurance
award by Money Magazine. A Magazine spokesperson said, “In these tough times consumers
need to reduce costs wherever they can and shopping around for car insurance is a must. Money
Magazine is pleased to be able to recognise and reward the best products and services –
particularly at a time where it’s so critical for consumers to rein in their spending.”
PAYD in State Emission Reduction Plans
Of 33 state climate action plans evaluated by the New America Foundation Climate Policy
Program, twelve include PAYD as a transportation emission reduction strategy, as summarized in
www.newamerica.net/files/State%20Climate%20Policy%20Tracker%205-4-09.xls. These states
include: AZ, CA, CO, MD, ME, MN, NH, NM, NC, RI, VA, and VT. The degree of emphasis
and support for PAYD varies. For example, the Rhode Island plan, while endorsing the
importance of the strategy, explicitly says that the state will likely wait for other states to figure
out how to promote PAYD insurance before it does so. Justin Horner of the National Resources
Defense Council described this analysis in the following blog:http://switchboard.nrdc.org/blogs/jhorner/thirteen_states_say_ok_lets_ha.html
PAY PER K Coverage (www.nedbank.co.za).
Nedbank, a major South African insurer, now offers Pay Per K vehicle insurance, which bases
premiums on monthly mileage. Pay per K monitors the distance a vehicle is driven each month
by means of a NedFleet card that is linked to the vehicle’s comprehensive motor insurance. Each
time the vehicle is refueled an odometer reading is recorded and used to calculate a monthly
insurance bill. Monthly premiums will fluctuate depending on the distance traveled in the
preceding month, and are debited monthly in arrears. This means motorists only pay for those
times when their vehicle is actively on the road and therefore most at risk.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
25
Polis Direct Kilometre Policy (www.kilometerpolis.nl)
Polis Direct (www.polisdirect.nl), a major Dutch insurance company, began offering their
“Kilometre Policy” in November 2004. Participating motorists must be at least 24 years of age,
have a car that sold new for less than €42,000 (euros), and drive less than 40,000 kms annually.
Per-kilometer premiums are calculated by dividing current premiums by the current policy’s
maximum annual kilometers, which is typically 20,000, so a motorist who currently pays €500
for up to 20,000 kilometers would pay €0.025. Participants pay an “advance premium,” which is
90% of their current premiums, so those who currently pay €500s under this system pay an
advance premium of €450. At the end of the policy term the motorist receives a rebate of up to
50% of their premium for lower mileage (in this case, a rebate up to €250 if they drive less than
10,000 kms), or their premiums can increase up to 50% if they drive more than the current
maximum (in this case, they could pay up to €750 if they drive 30,000 kilometers during the
policy year. If this motorist drives 20,000 kilometers they pay an extra €50, so their total
premium is the same as with a standard policy. In the following years the advance premium is
calculated based on the number of kilometers actually driven the previous year. Mileage is
calculated using odometer readings collected during annual vehicle inspections, called the
“national car card,” and recorded in the national vehicle registration database.
Holland PAYD Coverage (www.payasyoudrive.co.za).
Holland Insurance (www.hollard.co.za), South Africa’s largest insurer, offers Pay-As-You-Drive
vehicle insurance. Monthly premiums are based on the distance traveled in the preceding month.
Mileage is automatically recorded a Skytrax GPS tracking device. An article by the Mail &
Guardian’s Personal Finance columnist Maya Fisher-French explains, based on her own
experience, how this system allows motorists to save money by reducing their mileage
(www.payasyoudrive.co.za).
Progressive MyRate (www.progressive.com/MyRate/myrate-default.aspx)
The Progressive insurance company offers MyRate policies which provide discounts based on
based on when, how much and how a vehicle is driven. Cars that are driven less often, in less
risky ways and at less risky times of day can receive large discounts. Participating motorists
receive a MyRate device which they plug into their vehicle's On-Board Diagnostic (OBDII) port,
which records how much, how fast and when the vehicle is driven. This information is used to
calculate discounts the customer may receive when they renew their policy. The device reports
driving information by wireless communication.
PAYD As An Emission Reduction Strategy (USDOT 2010)
A Report To Congress produced by the U.S. Department of Transportation on potential
transportation emission reduction strategies ranked distance-based insurance as one of the
most effective, and by far the most cost effective way to reduce energy consumption and
pollution emissions out of several dozen evaluated.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
26
Conclusions
This study investigates the feasibility, benefits and costs of distance-based (or pay-as-
you-drive) vehicle insurance, how it can be implemented, and the experience where it has
been implemented.
Considerable research indicates that annual crash rates and claim costs tend to increase
with annual vehicle mileage. Annual mileage is one of several factors that have a
significant impact on annual crash rates. It would not be actuarially accurate to use
mileage instead of other rating factors, for example, to charge all motorists the same per-
mile insurance fee, but actuarial accuracy improves significantly if annual mileage is
incorporated in addition to existing rate factors. Any other price structure overcharges
low-mileage motorists and undercharges high-mileage motorists within each price class.
Distance-based insurance reflects the principle that prices should be based on costs. It
does not simply shift costs from one group to another. It gives consumers a new way to
save money by returning to individual motorists the insurance cost savings that result
when they drive less. This lets motorists limit their insurance costs by limiting
consumption, as with most other consumer goods. Motorists who continue their current
mileage would be no worse off on average then they are now (excepting additional
transaction costs), while those who reduce their mileage could save money. These result
in net savings to motorists and net benefits to society.
Distance-based insurance is technically and economically feasible. Several insurers have
successfully implemented distance-based pricing programs. Distance-based pricing can
help achieve several public policy goals, including actuarial accuracy, equity,
affordability, road safety, consumer savings and choice, reduced traffic congestion, road
and parking facility cost savings, and environmental protection. It can reduce the need for
cross-subsidies currently required to provide “affordable” unlimited-mileage coverage to
high-risk drivers.
Distance-based insurance can provide significant safety benefits. Because most crashes
involve multiple vehicles, reduced vehicle mileage can cause a proportionally greater
reduction in crash costs and insurance claims. Some types of distance-based insurance
give higher-risk drivers an extra incentive to reduce mileage, and some give motorists an
extra incentive to avoid higher risk travel conditions. As a result, each 1.0% reduction in
total mileage caused by distance-based insurance can reduce total crash costs by 1.4% to
2.0%. Distance-based insurance could reduce total crashes by 15% or more.
Distance-based pricing can provide substantial benefits to lower-income motorists. Since
annual vehicle mileage tends to increase with income, fixed-price insurance tends to
cause lower-income motorists to subsidize the insurance costs of higher-income motorists
within their rate class. Distance-based insurance pricing provides overall savings to
lower-income motorists, and would allow some low-income households to insure a
vehicle used for basic mobility that they currently cannot afford.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
27
This study evaluated several distance-based pricing options:
1. Mileage Rate Factor (MRF) incorporates an annual mileage rate factor into the existing rate
system. It is the easiest option to implement, but is constrained by the weight that can be
placed on self-reported mileage estimates. Its travel impacts and benefits are small.
2. Pay-at-the-Pump (PATP) funds basic insurance coverage through a surcharge on fuel sales. It
is not actuarially accurate because payments are based on vehicle fuel consumption, not risk
factors. Less than half of insurance payments would be distance-based, and cross-border and
illegal fuel purchases could be major problems. It causes a relatively large reduction in fuel
consumption but modest reductions in vehicle travel, providing modest overall benefits.
There would probably be little administrative cost savings because motorists would still need
to pay registration fees and purchase optional coverage as they do now.
3. Per-Mile Premiums change the unit of exposure from the vehicle-year to the vehicle-mile,
incorporating all existing rating factors. They require odometer audits to provide accurate
mileage data, predicted to cost an average of $6 per vehicle-year. This could be mandatory or
a consumer option. Per-Mile Premiums significantly improve actuarial accuracy and provide
significant consumer savings, particularly to lower income households. Because they cause
large vehicle travel reductions they provide large benefits. As a consumer option they are
predicted to attract 25-50% of motorists within a few years, and more over time.
4. Per-Minute Premiums use a small electronic meter to record when an engine operates,
predicted to cost $30 per year. This allows rates to vary by time of day. Because it can give
motorists an extra incentive to reduce their peak-period travel it can provide even greater
benefits than Per-Mile Premiums, but the additional equipment costs reduce the net benefits.
As a consumer option it is predicted to attract 12-25% of motorists within a few years.
5. GPS-Based Pricing uses GPS (Global Positioning System) technology to track vehicle travel,
allowing insurance prices to reflect when and where a vehicle is driven in addition to existing
rating factors. It is predicted to cost $150 or more per vehicle-year and raises privacy
concerns. Installation costs may decline somewhat in the future as more vehicles have
factory-equipped GPS transponders. It is most actuarial accurate and can cause the greatest
crash reduction per participating vehicle. However, its high equipment costs offset the direct
benefits for most consumers. As a consumer option it is predicted to attract 10% or less of
total motorists, so total benefits would be modest for the foreseeable future.
Table 22 summarizes the implementation costs and effectiveness at achieving various
objectives for the seven distance-based pricing options considered in this study.
Table 8 Summary of Distance-Based Pricing Options
Implementation Costs Effectiveness
Mileage Rate Factor Low Low
Pay-At-The-Pump High Medium
Per-Mile Premiums, Mandatory Low High
Per-Mile Premiums, Optional Low Medium
Per-Minute Premiums, Mandatory Medium High
Per-Minute Premiums, Optional Medium Medium
GPS-Based Pricing High Low
This table summarizes overall implementation costs and effectiveness at achieving objectives.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
28
This analysis indicates that Mandatory Per-Mile Premiums provide the greatest net
benefits, due to relatively low costs and high effectiveness at achieving objectives (Parry
2004 and Babiuk 2008 reach similar conclusions). It provides direct financial savings and
net benefits to most motorists, and less than one in five would perceive significantly
higher insurance costs. These benefits increase further if vehicle registration fees are also
mileage-based. Optional distance-based pricing results in greater direct consumer benefits
per participating vehicle, but smaller total benefits due to low market penetration and the
low average mileage of motorists who would choose it. However, market penetration is
predicted to increase over time as it becomes more financially attractive compared with
fixed-rate premiums.
Because Per-Minute Premiums and GPS-Based Pricing provide an extra incentive to
reduce peak-period driving they can provide extra congestion and pollution reduction
benefits. This might justify partial subsidy of these options, depending on the value
placed on these incremental benefits. However, more research is needed to evaluate the
incremental costs, travel impacts, and social benefits.
Distance-based insurance pricing has two different types of effects on consumers. It
provides savings to motorists who currently drive less than their price-group average,
which represents a reduction in their current cross-subsidies to higher-mileage motorists
within their price group. These are economic transfers that are justified on equity grounds.
In addition, there are overall savings and benefits that result as motorists reduce their
mileage, which reduce total crash costs, insurance costs, congestion, road and parking
facility costs, and environmental impacts. These are resource cost savings, which are
justified on economic efficiency grounds.
There is likely to be strong support for optional distance-based insurance pricing since it
increases consumer choice and gives individual motorists a new opportunity to save
money. Consumers are accustomed to being able to choose from various rate structures
for many types of goods, such as telephone service, Internet service, and air travel. If
cross-subsidies are not allowed between the different pricing pools, an increasing portion
of motorists would switch to it over time.
There is mixed public support for mandatory distance-based insurance. Citizens generally
support pricing that increases fairness and affordability, and helps solve specific
problems, but are skeptical of reforms that may be less convenient, increase costs, or
burden certain groups. PATP appears to be the least popular option. Usage-Based
Premiums appears to have about equal levels support and opposition, with responses
affected by the concept is presented. If described as a reward to consumers who use
alternative modes it tends to have a positive response, but if presented as a surcharge on
higher-mileage motorists it tends to have a more negative response.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
29
Under some circumstances consumers seem to prefer fixed prices, because they are
predictable and minimize transaction costs. However, this preference appears to be weak.
Fixed-rate pricing is relatively uncommon in competitive markets, and some markets are
shifting toward more marginal pricing. There is no evidence that consumers have a strong
preference for fixed-priced insurance. Given the choice, most motorists who expect to
save money would probably choose optional distance-based insurance.
Many of the concerns raised about distance-base pricing reflect misunderstanding of the
concept, and so can be addressed with public education. Insurers have five legitimate
financial concerns about distance-based insurance.
1. It is possible that the mileage foregone will be lower than average risk. As a result, premium
revenue could decline more than claim costs.
2. Optional distance-based pricing could attract motorists with relatively high per-mile claim
costs.
3. With optional distance-based pricing, motorists in multi-vehicle households could shift
driving from vehicles with distance-based premiums to those with fixed premiums.
4. Total premiums would probably decline, assuming distance-based pricing is successful at
reducing claims. Although revenue reductions would be offset by reduced claim costs, this
would reduce investment income, which could reduce insurance company profits.
5. Some motorists may try odometer fraud to steal insurance. However, odometers are
increasingly tamper-resistant, and most types of fraud could be detected during annual audits
and crash investigations. Odometer auditing should provide data comparable in accuracy to that
used in other common commercial transactions.
Offsetting these financial risks is the fact that a percentage reduction in mileage usually
provides a proportionally greater reduction in claims. Available empirical evidence
suggests that each 1% reduction in mileage typically causes a 1.4-1.8% reduction in
claims, making insurers financially better off. This increases the net savings from
distance-based pricing and reduces the financial risks to insurers.
These concerns can be addressed by implementing distance-based pricing pilot projects
to obtain information on feasibility, costs, consumer demand, travel impacts, crashes, and
revenue impacts. These could start small, and if no major problems are encountered they
could expand until all motorists are offered distance-based pricing.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
30
References And Resources For More Information
AAA (annual reports), Your Driving Costs, American Automobile Association
(www.ouraaa.com), various years. Based on Runzheimer International data.
Michelle Babiuk (2008), Distance Based Vehicle Insurance: Actuarial And Planning Issues, B.A.
(Hon), Masters Thesis, Community and Regional Planning, University of British Columbia; athttp://circle.ubc.ca/bitstream/handle/2429/752/ubc_2008_spring_babiuk_michelle.pdf.
Dean Baker and Jim Barrett (1998), The Feasibility of Pay by the Mile Automobile Insurance,
Economic Policy Institute (www.epinet.org).
J.W. Bolderdijka, J. Knockaertb, E.M. Stega and E.T. Verhoefb (2010), “Effects of Pay-As-You-
Drive Vehicle Insurance On Young Drivers’ Speed Choice: Results Of A Dutch Field
Experiment,” Accident Analysis and Prevention, Vol. 43, pp. 1181–1186.
Matthew Bomberg, Richard T. Baker and Ginger Goodin (2009), Mileage?Based User Fees – A
Path toward Implementation; Phase 2: An Assessment of Technology Issues, UTCM 09-39-07,
Texas Transportation Institute (http://utcm.tamu.edu); athttp://utcm.tamu.edu/publications/final_reports/Goodin_tech_09-39-07.pdf.
Jason E. Bordoff (2008), Pay-As-You-Drive Car Insurance, Brookings Institution
(www.brookings.edu/articles/2008/spring_car_insurance_bordoff.aspx).
Jason E. Bordoff and Pascal J. Noel (2008), Pay-As-You-Drive Auto Insurance: A Simple Way to
Reduce Driving-Related Harms and Increase Equity, The Brookings Institution
(www.brookings.edu); at www.brookings.edu/papers/2008/07_payd_bordoffnoel.aspx.
Stephen Brobeck and J. Robert Hunter (2012), Lower-income Households and the Auto Insurance
Marketplace: Challenges and Opportunities, Consumer Federation of America
(www.consumerfed.org); at www.consumerfed.org/news/450.
Patrick Butler (1992), Operation of an Audited-Mile/Year Automobile Insurance System Under
Pennsylvania Law, Cents Per Mile Now (www.centspermilenow.org); at
www.casact.org/pubs/forum/93sforum/93sforum.pdf.
Patrick Butler (2000), Why The Standard Automobile Insurance Market Breaks Down In Low
Income Zip Codes, Report to the Texas House Committee on Insurance; at
www.centspermilenow.org/633b-4522.pdf. Also see “Pay-per-Mile Auto Insurance” Consumer
Economic Issues in America, (2003); at www.centspermilenow.org/652Garma.pdf.
Cambridge Systematics (2006), Mileage-Based User Fee Demonstration Project: Potential
Public Policy Implications of Pay-As-You-Drive Leasing and Insurance Products, Final report
2006-39C, Minnesota Department of Transportation (www.lrrb.org); at
www.lrrb.org/pdf/200639C.pdf.
CAS (1996), Foundations of Casualty Actuarial Science, 3
rd
Edition, Casualty Actuarial Society
(Arlington; www.casact.org).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
31
CDI (2008), Insurance Commissioner Poizner Sets Framework For Environmentally–Friendly
Automobile Insurance, Increased Options For Consumers, California Department of Insurance
(www.insurance.ca.gov); at www.insurance.ca.gov/0400-news/0100-press-releases/0070-
2008/release089-08.cfm.
Cents Per Mile For Car Insurance (www.centspermilenow.org) is a website that promotes “cents
per mile” vehicle insurance as allowed by legislation passed in the state of Texas in 2001.
Ceres (2009), Drive Less, Pay Less: Environmental and Transportation Groups Unveil
Performance Standard for Pay-As-You-Drive Auto Insurance, Ceres Investors and
Environmentalists for Sustainable Prosperity (www.ceres.org); at
www.ceres.org/Page.aspx?pid=1157.
Harry Clarke and David Prentice (2009), A Conceptual Framework For The Reform Of Taxes
Related To Roads And Transport, School of Economics and Finance, La Trobe University, for the
Australia Treasury Australia's Future Tax System review; athttp://apo.org.au/research/conceptual-framework-reform-taxes-related-roads-and-transport.
Stephen J. Dubner and Steven D. Levitt (2008), “Freakonomics: Not-So-Free Ride,” New York
Times, April 20, 2008, (www.nytimes.com/2008/04/20/magazine/20wwln-freakonomics-t.html).
Aaron S. Edlin (2003), “Per-Mile Premiums for Auto Insurance,” Economics for an Imperfect
World: Essays In Honor of Joseph Stiglitz, MIT Press; at:http://works.bepress.com/aaron_edlin/28.
Aaron S. Edlin and Pinar Karaca Mandic (2006), “The Accident Externality from Driving,”
Journal of Political Economy, Vol. 114, No. 5, pp. 931-955; athttp://works.bepress.com/aaron_edlin/21.
Environmental Defense PAYD Website (www.edf.org/page.cfm?tagID=31651) provides
information on a campaign to promote pay as you drive vehicle insurance.
ETAAC (2008), Recommendation of the Economic and Technology Advancement and Advisory
Committee (ETAAC), Economic and Technology Advancement Advisory Committee, California
Air Resources Board (www.arb.ca.gov); at www.arb.ca.gov/cc/etaac/ETAACFinalReport2-11-
08.pdf.
Exigen (2008), Pay-Only-As-You-Drive Survey, Exigen Insurance Solutions; at
www.exigeninsurance.com/fsp/enews/Exigen_PAYD_Survey_Report.pdf.
Joseph Ferreira Jr. and Eric Minike (2010), Pay-As-You-Drive Auto Insurance In Massachusetts:
A Risk Assessment And Report On Consumer, Industry And Environmental Benefits, by the
Department of Urban Studies and Planning, Massachusetts Institute of Technology
(http://dusp.mit.edu) for the Conservation Law Foundation (www.clf.org); at www.clf.org/our-
work/healthy-communities/modernizing-transportation/pay-as-you-drive-auto-insurance-payd.
Keri Funderberg, Michael Grant and Ed Coe (2003), “Changing Insurance One Mile At A Time,”
Contingencies (www.contingencies.org/novdec03/changing.pdf), Nov./Dec. 2003, pp. 34-38.
Ginger Goodin, Richard T. Baker and Lindsay Taylor (2009), Mileage?Based User Fees – A Path
toward Implementation; Phase 2: An Assessment of Institutional Issues, UTCM 09-39-07, Texas
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
32
Transportation Institute (http://utcm.tamu.edu); athttp://utcm.tamu.edu/publications/final_reports/Goodin_inst_09-39-07.pdf.
Allen Greenberg (2009), “Designing Pay-Per-Mile Auto Insurance Regulatory Incentives,”
Transportation Research D, Volume 14, Issue 6, August, pp. 437-445; earlier version at
www.vtpi.org/07-3457.pdf.
Randall Guensler, Adjo Amekudzi, Jennifer Williams, Shannon Mergelsberg and Jennifer Ogle
(2003), “Current State Regulatory Support for Pay-as-You-Drive Automobile Insurance
Options,” Journal of Insurance Regulation, National Association of Insurance Commissioners
(www.naic.org) Volume 21, No. 3, Spring 2003.
Christine Hagerbaumer (2001), Oregon Environmental Council (www.oeconline.org).
Robin Harbage (2009) Usage Based Insurance-From Theory to Practice, Casualty Actuarial
Society (www.casact.org); at www.casact.org/education/rpm/2009/handouts/harbage2.pdf.
Winston Harrington and Ian W.H. Parry (2005), “Pay-As-You-Drive Car Insurance,” New
Approaches on Energy and the Environment, Resources for the Future (www.rff.org); at
www.rff.org/Documents/08_New_Approaches/09-Pay-As-You-Drive-for-Car-Insurance.pdf.
Edward Huang, Henry Lee, Grant Lovellette and Jose Gomez-Ibanez (2010), Transportation
Revenue Options: Infrastructure, Emissions, and Congestion, Belfer Center, Harvard Kennedy
School (www.belfercenter.org/enrp); athttp://belfercenter.ksg.harvard.edu/files/Transportation Revenue Options Workshop%
20Report%202010%20for%20web.pdf.
Lyn Hundstad, Robert Bernstein and Jerry Turem (1994), Impact Analysis of Weighting Auto
Rating Factors to Comply with Proposition 103, Ca. Dept. of Insurance (www.insurance.ca.gov).
ICF Incorporated (1997), Opportunities to Improve Air Quality Through Transportation Pricing
Programs, USEPA (www.epa.gov).
Mary Janke (1991), “Accidents, Mileage, and the Exaggeration of Risk,” Accident Analysis &
Prevention, Vol. 23, No. 3, pp. 183-188.
Per Kågeson and Jos Dings (1999), Electronic Kilometre Charging for Heavy Goods Vehicles in
Europe, European Federation for Transport and Environment (www.t-e.nu).
King County (2007), King County Gets $1.9 Million To Test Drive Innovative Statewide Car
Insurance Program, (www.kingcounty.gov); athttp://your.kingcounty.gov/exec/news/2007/0327payasdrive.aspx.
Todd Litman (1997), “Distance-Based Vehicle Insurance as a TDM Strategy,” Transportation
Quarterly, Vol. 51, No. 3, Summer, pp. 119-138; at www.vtpi.org/dbvi.pdf.
Todd Litman (2001), Distance-Based Vehicle Insurance Feasibility, Benefits and Costs:
Comprehensive Technical Report, VTPI (www.vtpi.org); at www.vtpi.org/dbvi_com.pdf.
Todd Litman (2004), Pay-As-You-Drive Pricing For Insurance Affordability, VTPI
(www.vtpi.org); at www.vtpi.org/payd_aff.pdf.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
33
Todd Litman (2004b), Transportation Cost and Benefit Analysis, Victoria Transport Policy
Institute (www.vtpi.org).
Todd Litman (2005), “Pay-As-You-Drive Pricing and Insurance Regulatory Objectives,” Journal
of Insurance Regulation, Vol. 23, No. 3, National Association of Insurance Commissioners
(www.naic.org), Spring; at www.vtpi.org/jir_payd.pdf.
Todd Litman (2007), Pay-As-You-Drive Pricing in British Columbia: Backgrounder, VTPI
(www.vtpi.org); at www.vtpi.org/paydbc.pdf.
Todd Litman (2007), Win-Win Emission Reduction Strategies: Smart Transportation Strategies
Can Achieve Emission Reduction Targets And Provide Other Important Economic, Social and
Environmental Benefits, VTPI (www.vtpi.org); at www.vtpi.org/wwclimate.pdf.
Todd Litman (2008), Pay-As-You-Drive Insurance: Recommendations for Implementation, VTPI
(www.vtpi.org); at www.vtpi.org/payd_rec.pdf.
Todd Litman (2011), Pay-As-You-Drive Vehicle Insurance in British Columbia, Pacific Institute
for Climate Solutions (www.pics.uvic.ca); at
www.pics.uvic.ca/assets/pdf/publications/PAYD%20Insurance_May2011.pdf.
Todd Litman and Steven Fitzroy (2005), Safe Travels: Evaluating Mobility Management Traffic
Safety Impacts, VTPI (www.vtpi.org); at www.vtpi.org/safetrav.pdf.
METRO (2007), Pay-as-You-Drive (PAYD) Insurance Pilot Project, King County Metro
(www.metrokc.gov/exec/news/2007/pdf/Payasyougofacts.pdf).
MetroMile (www.metromile.com) began offering policies in Oregon in 2012. It uses an electronic
device that plugs into a vehicle data port to track daily mileage which is used to calculate monthly
insurance bills. The company estimates that most motorists who drive less than 10,000 annual
miles will save with this policy.
MVMA (1995), Facts and Figures 95, Motor Vehicle Manufacturers Association.
NAIC (various years), Average Expenditures and Premiums for Personal Automobile Insurance,
National Association of Insurance Commissioners (www.naic.org/store_pub_statistical.htm).
NCTCOG (2008), Pay As You Drive (PAYD) Insurance Pilot Program, Progressive County
Mutual Insurance Company and the North Central Texas Council of Governments
(www.nctcog.org); at www.nctcog.org/trans/air/programs/payd/index.asp.
NMA (1998), Position on Auto Insurance, National Motorists Association
(www.motorists.org/insurance).
NOW, Congress Can End Overcharging By Auto Insurers; Per Mile Auto Insurance Option Act,
National Organization for Women (www.now.org/issues/economic/insurance).
Oregon Environmental Council PAYD campaign (www.oeconline.org/our-
work/climate/transportation/payd)
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
34
Ian W. H. Parry (2004), “Comparing Alternative Policies to Reduce Traffic Accidents,” Journal
of Urban Economics, Vol. 54, No. 2 (www.elsevier.com/locate/jue), September, pp. 346-368.
Ian W.H. Parry (2005), Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than
Gasoline Taxes?, Resources for the Future (www.rff.org/Documents/RFF-DP-05-15.pdf).
Ian W. H. Parry, Margaret Walls and Winston Harrington (2007), Automobile Externalities and
Policies, Discussion Paper 06-26, Resources for the Future (www.rff.org); at
www.rff.org/rff/Documents/RFF-DP-06-26-REV.pdf.
Sightline (2003), NEW Facts: Pay-As-You-Drive Car Insurance, NorthWest Environment Watch
(www.sightline.org/research/sust_toolkit/solutions/payd).
Stephen Sugarman (1993), “Pay at the Pump” Auto Insurance, Ins. of Gov. Studies (Berkeley).
TNO (2003), “Pay As You Drive” In The Netherlands, TNO Inro, Institute for Traffic and
Transport (www.inro.tno.nl/doc.php?nr=1436).
USDOT (2010), Transportation's Role in Reducing U.S. Greenhouse Gas Emissions: Volume 1,
Report to Congress, U.S. Department of Transportation (www.dot.gov), athttp://ntl.bts.gov/lib/32000/32700/32779/DOT_Climate_Change_Report_-_April_2010_-
_Volume_1_and_2.pdf.
USEPA (1998), Technical Methods for Analyzing Pricing Measures to Reduce Transportation
Emissions, US Environmental Protection Agency #231R98006 (www.epa.gov/clariton).
William Vickrey (1968), “Automobile Accidents, Tort Law, Externalities and Insurance: An
Economist’s Critique,” 33 Law and Contemporary Problems, pp. 464-470; at
www.vtpi.org/vic_acc.pdf.
Tanja Vonk, Marten Janse, Jos Dings and Huib van Essen (2003), Pay As You Drive (PAYD):
Scope for a Variable Car Insurance Premium in the Netherlands? CE Delft
(www.rapportsysteem.nl/artikel/index.php?id=235&action=read).
VTPI (2004), Online TDM Encyclopedia, VTPI (www.vtpi.org).
Tom Wenzel (1995), Analysis of National Pay-as-you-Drive Insurance Systems and other
Variable Driving Charges, Energy & Environment Division, Lawrence Berkeley Laboratory; at
www.osti.gov/energycitations/product.biblio.jsp?osti_id=125357.
“Usage Based Insurance,” Wikipedia (http://en.wikipedia.org/wiki/PAYD).
Steve Winkelman (2007), Travel Demand and Urban Form: Lessons and Visions, Asilomar
Conference on Transportation and Climate Policy, 22 August 2007; at
www.its.ucdavis.edu/events/outreachevents/asilomar2007/presentations/Day%201%20Session%2
03/Winkelman%20Intro%20to%20Asilomar%20Demand%20Session%20(8.22.07).pdf.
www.vtpi.org/dbvi.pdf
doc_236423175.pdf
Vehicle insurance is generally considered a fixed cost with respect to vehicle use.
Motorists do not usually perceive insurance cost savings when they reduce mileage.
Distance-based (also called Pay-As-You-Drive and Per-Mile) insurance pricing converts
insurance to a variable cost, so premiums are directly related to annual mileage.
Distance-based pricing makes vehicle insurance more actuarially accurate (premiums
better reflect the claim costs of each vehicle) and gives motorists a new opportunity to
save money when they reduce their mileage. It can help achieve several public policy
objectives including equity, road safety, consumer savings and choice, congestion
reduction, facility cost savings, energy savings and environmental protection. This papercompares several distance-based insurance pricing options, and evaluates concerns
and criticisms. The analysis indicates that distance-based pricing is technically and
economically feasible, and can provide significant benefits to motorists and society.
www.vtpi.org
[email protected]
250-360-1560
© 1997-2011
Todd Alexander Litman
All Rights Reserved
Distance-Based Vehicle Insurance
As A TDM Strategy
10 December 2012
By Todd Litman
Victoria Transport Policy Institute
Abstract
Vehicle insurance is generally considered a fixed cost with respect to vehicle use.
Motorists do not usually perceive insurance cost savings when they reduce mileage.
Distance-based (also called Pay-As-You-Drive and Per-Mile) insurance pricing converts
insurance to a variable cost, so premiums are directly related to annual mileage.
Distance-based pricing makes vehicle insurance more actuarially accurate (premiums
better reflect the claim costs of each vehicle) and gives motorists a new opportunity to
save money when they reduce their mileage. It can help achieve several public policy
objectives including equity, road safety, consumer savings and choice, congestion
reduction, facility cost savings, energy savings and environmental protection. This paper
compares several distance-based insurance pricing options, and evaluates concerns
and criticisms. The analysis indicates that distance-based pricing is technically and
economically feasible, and can provide significant benefits to motorists and society.
What would be the consequences if gasoline were sold like vehicle insurance?
With gasoline sold by the car-year, vehicle owners would make one annual advance payment
which allows them to draw gasoline unrestricted at a company’s fuel stations. Prices would be
based on the average cost of supplying gasoline to similar motorists.
Unmetered fuel would cause a spiral of increased fuel consumption, mileage, and overall vehicle
costs, including externalities such as accident risk, congestion and pollution. Motorists who use
less fuel than average would find this unfair and unaffordable, and so would drop out of the
system, but those who use more fuel than average would defend it because they enjoy benefits.
Such a system would be irrational. It is comparable to current insurance pricing.
An earlier version of this paper was published in Transportation Quarterly, Vol. 51, No. 3, Summer 1997, pp.
119-138. The comprehensive technical report of this study, Distance-Based Vehicle Insurance; Feasibility,
Costs and Benefits, is available at www.vtpi.org/dbvi_com.pdf.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
1
Introduction
This report explores the feasibility of implementing distance-based (also called pay-as-
you-drive, per-mile and usage-based) motor vehicle insurance pricing. Insurance is
currently a fixed cost with respect to vehicle travel. A reduction in vehicle mileage does
not usually provide a comparable reduction in insurance premiums. Distance-based
pricing converts insurance into a variable cost, so reducing a vehicle’s annual mileage
reduces its insurance premiums, all else being equal.
Distance-based insurance is based on the principle that prices should reflect costs, so
consumers who reduce the costs they impose should receive proportionate savings.
Reduced driving reduces the risk of crashes and insurance claims. With current pricing,
claim cost savings that result when motorists reduce their mileage are retained as profits
by insurers, or returned to premium payers as a group. With distance-based pricing these
savings are returned to the individual motorist that reduces mileage. The less you drive
the more you save, reflecting the insurance cost savings you create.
Motorist Reduces Mileage
?
Reduced Crashes
?
Insurance Cost Savings
Distance-based pricing returns to individual motorists the insurance cost
savings that result when they drive less. It rewards motorists for reducing
mileage and makes premiums more accurately reflect the insurance costs of
each individual vehicle.
Distance-based pricing gives motorists a new opportunity to save money. To illustrate
this, consider the situation of a low-income worker who becomes unemployed and so
reduces their vehicle travel. With current pricing they must continue paying the same
insurance premiums, although both their income and crash risk decline. After extended
unemployment they may find insurance expenses, and therefore vehicle ownership, a
major financial burden. With distance-based pricing, motorists who reduce their mileage
pay smaller premiums, but can still insure a car for essential trips, job searches, and
temporary employment.
Distance-based pricing provides a marginal financial incentive to reduce mileage,
allowing individual consumers decide which miles, if any to forego. Any vehicle-miles
reduced consist of lower-value vehicle travel that motorists willingly give up in exchange
for financial savings, representing a net consumer surplus. Motorists who continue their
current mileage are no worse off on average with distance-based pricing (excepting any
additional transaction costs), while those who reduce mileage are better off overall. To
the degree that motorists reduce mileage, and therefore crashes and insurance claims, the
savings that result are net benefits to society, not just economic transfers.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
2
Distance-based insurance pricing can provide the following benefits:
? Increased actuarial accuracy, making premiums more accurately reflect the insurance costs of
an individual vehicle, which is fairer and more economically efficient.
? Improved safety. It reduces total vehicle traffic, giving higher-risk motorists an extra large
incentive to reduce mileage, and therefore the crash risk to themselves and other road users.
? Reduced average annual mileage by participating vehicles, which reduces traffic congestion,
roadway costs, energy consumption, and pollution emissions.
? Consumer savings and affordability. Motorists have a new opportunity to save money, which
is particularly beneficial to lower-income households.
? Reduced need for cross-subsidies from low-risk motorists to provide affordable coverage for
higher-risk motorists. It should substantially reduce uninsured driving.
? Is progressive with respect to income. Since average annual mileage per vehicle increases
with income, most lower-income motorists should save money.
? Improved consumer options. Motorists can choose the price structure that best meets their
needs, and can afford to insure a vehicle that is driven low annual miles.
There are also barriers and costs associated with distance-based pricing:
? It requires insurers and brokers to change how they calculate premiums, develop new
procedures, and modify computer programs.
? When first implemented, insurers will face uncertainty as they develop actuarial experience
with this rate structure.
? Distance-based pricing systems often increase transaction costs. Incremental costs range from
less than $10 to more than $150 per vehicle-year, depending on the system used.
? It makes premiums and insurance revenues less predictable. Motorists and insurers would not
know total premiums until the end of the insurance term.
? It increases premiums for some motorists.
? It has mixed political support, and there may be opposition from some stakeholders.
? Many people are skeptical of predicted benefits.
This report describes and compares various distance-based pricing systems, and examines
their incremental benefits and costs. It discusses their implementation requirements and
various concerns that have been raised about distance-based insurance.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
3
Insurance Pricing
There is growing appreciation of the potential for market instruments to increase
transportation efficiency and address specific problems such as congestion, pollution, and
crashes (USEPA 1997). Current motor vehicle prices are economically inefficient, since
prices do not reflect marginal costs (“Market Principles,” VTPI 2004). Nearly a third of
vehicle costs are external and a quarter are internal but fixed, as illustrated in Figure 1.
Figure 1 Distribution of Vehicle Costs (Litman 2004b)
Internal Fixed
Costs
23%
Internal
Variable
Costs
45%
External
Costs
32%
A majority of automobile costs are either fixed or external.
Figure 2 shows the distribution of typical motor vehicle expenses. Most are considered
fixed with respect to vehicle travel. Insurance is generally considered a fixed cost, since
once a policy is purchased there is usually no savings from mileage reductions.
Figure 2 Distribution of Automobile Expenses (AAA 2003)
Short -Term Parking
& Tolls
4%
Depreciation
31%
Insurance
21%
Financing
6%
Fuel & Oil
19%
Tires
3%
Registration
3%
Maintenance
13%
Variable
Costs
Fixed
Costs
This figure illustrates the distribution of financial costs for an intermediate size car.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
4
Although fixed vehicle expenses have increased during the last three decades, variable
costs have decreased in real terms. As a result, variable costs as a portion of total costs
have declined, as indicated in Figure 3.
Figure 3 Vehicle Cost Trends (MVMA 1995; AAA 2000)
0%
10%
20%
30%
40%
1950 1960 1970 1980 1990 2000
P
e
r
c
e
n
t
a
g
e
o
f
T
o
t
a
l
V
e
h
i
c
l
e
C
o
s
t
s
Variable Expenses
Insurance
The variable portion of vehicle costs declined from about 40% in 1950 to 22% in 2000.
Distance-based insurance increases variable vehicle costs without increasing total costs.
Insurance premiums average about $850 per vehicle-year, resulting in distance-based
premiums averaging about 7¢ per vehicle-mile.
1
Vehicle registration and licensing fees
average about $250 annually, resulting in distance-based fees averaging about 2¢ per
vehicle-mile. Fees of this magnitude would reduce vehicle travel by about 10-12%, as
indicated in Table 1.
Table 1 Mileage Fee VMT Impacts (USEPA 1998, based on Table B.21)
VMT Fee Change in VMT VMT Fee Change in VMT
1¢ -1.6 6¢ -8.7
2¢ -3.1 7¢ -10.0
3¢ -4.6 8¢ -11.2
4¢ -6.0 9¢ -12.4
5¢ -7.4 10¢ -13.6
This table shows predicted vehicle travel reductions from distance-based fees (updated to 2005
US Dollars).
1
For average insurance premium data see the Insurance Information Institute
(www.iii.org/media/facts/statsbyissue/auto).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
5
Relationship Between Vehicle Travel and Crashes
Increased annual vehicle mileage tends to increase annual crash risk, all else being equal
(CAS 1996, p. 35, 242 and 250; Litman 2004c; Ferreira and Minike 2010). Even a
“perfect” driver faces risks from causes beyond their control—an animal running into the
roadway, catastrophic mechanical failure, a heart attack—that increase with mileage.
Annual crash risk is the product of two factors: per-mile crash risk multiplied by annual
mileage. Although higher-risk drivers may crash every 50,000 miles, while lower-risk
drivers may crash only every 500,000 miles, in either case a reduction in mileage reduces
collisions.
Since about 70% of crashes involve multiple vehicles, each 1.0% mileage reduction
should reduce total crash costs by 1.7%.
2
The elasticity of vehicle insurance costs with
respect to mileage is between 1.42 and 1.85, which means that a 10% reduction in total
vehicle mileage reduces total crash costs, insurance claims, and casualties by 14% to 18%
(Edlin 2003).
High annual mileage drivers tend to have relatively low per-mile crash rates, as described
in the box below. This reflects crash rates between different motorists and does not
necessarily apply to mileage reductions by individual motorists. Most risk factors
described in the box do not change when an individual driver reduces annual mileage. A
motorist who drives 10% less in response to a price incentive does not usually become
less skilled, take more chances or shift to a less safe vehicle as a result.
Higher-mileage vehicles tend to have relatively low per-mile crash rates because (Janke 1991):
? Higher-risk motorists tend to limit their annual mileage while high-mileage drivers are likely
to be relatively capable drivers.
? Higher-mileage motorists tend to drive newer, mechanically safer vehicles.
? Urban drivers tend to have higher crash rates and lower annual vehicle mileage.
? Higher-mileage motorists tend to do a greater share of driving on grade-separated highways.
In the past, reliable information on the relationship between individual vehicles’ annual
mileage and crashes was unavailable. Most insurers collect only limited and self-reported
mileage data, which vehicle owners often understate to qualify for lower rates. Other data
are highly aggregate, based on total vehicle travel and crashes in a state. However, in the
Vancouver, British Columbia region, mileage readings collected during emission checks
were matched with individual vehicles’ insurance claim records for more than 500,000
vehicle-years, providing reliable data.
3
Figure 4 illustrates the distribution of annual
mileage categories (mileage refers to annual vehicle-kilometers in this context).
2
For example, if you reduce your mileage by 10% you would expect a 10% reduction in your crash risk. If
you did not reduce your mileage but all other motorists reduced their mileage by 10% you could expect a
7% reduction in crash risk, since 70% of your crashes involve other vehicles. If you and all other motorists
reduce mileage by 10% you could expect a total 17% reduction in crash risk.
3
For more information on this data set see, Distance-Based Vehicle Insurance Feasibility, Costs and
Benefits (www.vtpi.org/dbvi_com.pdf).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
6
Figure 4 Distribution of Annual Vehicle Mileage
0
50,000
100,000
150,000
200,000
<
5
,0
0
0
5
,0
0
0
-
9
,9
9
9
1
0
,0
0
0
-
1
4
,9
9
9
1
5
,0
0
0
-
1
9
,9
9
9
2
0
,0
0
0
-
2
4
,9
9
9
2
5
,0
0
0
-
2
9
,9
9
9
3
0
,0
0
0
-
3
4
,9
9
9
3
5
,0
0
0
-
3
9
,9
9
9
4
0
,0
0
0
-
4
4
,9
9
9
4
5
,0
0
0
-
4
9
,9
9
9
Annual Vehicle Kilometres
N
u
m
b
e
r
o
f
V
e
h
i
c
l
e
s
This figure shows the distribution of annual vehicle-kilometres in the database.
Figure 5 illustrates the crash rates by annual vehicle mileage for all records in aggregate.
Figure 5 Crash Rates by Annual Vehicle Mileage
4
0.00
0.02
0.04
0.06
0.08
0.10
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
Annual Vehicle Kilometres (1,000s)
C
r
a
s
h
-
R
e
l
a
t
e
d
C
l
a
i
m
s
P
e
r
Y
e
a
r
Total
Non-Culpable
Culpable
Casualty
Annual crashes tend to increase with annual kilometres at the aggregate level.
Figure 6 shows crash rates by major category. Figure 7 illustrates crash rates for
individual “Low-Risk” categories (vehicles with more than eight continuous years
without a culpable claim). Annual crash rates tend to increase with annual mileage.
Because of the offsetting factors described above that result in relatively low per-mile
crash rates for high annual mileage vehicles, and relatively high per-mile crash rates for
low annual mileage vehicles, the relationship between annual mileage and annual crashes
for individual vehicles is probably stronger than indicated by this aggregate data.
4
British Columbia mileage and crash data.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
7
Figure 6 Crashes Per Year By Major Category
0.00
0.05
0.10
0.15
0.20
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
Annual Kilometer Category (1,000s)
C
r
a
s
h
-
R
e
l
a
t
e
d
C
l
a
i
m
s
P
e
r
Y
e
a
r
Overall Average
Low-Risk
Non-RoadStar
Pleasure Only
To/From Work
Business
Urban Core
Urban Fringe
Other Areas
All categories show a positive relationship between crashes and vehicle travel.
These graphs and other analysis described in the comprehensive technical report show a
strong positive relationship between annual vehicle travel and crashes in virtually all
price categories. This indicates that distance-based pricing increases actuarial accuracy
(i.e., makes premiums better reflect an individual vehicle’s claim costs).
Figure 7 Crashes Per Year By Category, Low-Risk Vehicles
0.00
0.01
0.02
0.03
0.04
0.05
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
Annual Kilometer Category (1,000s)
C
r
a
s
h
-
R
e
l
a
t
e
d
C
l
a
i
m
s
P
e
r
Y
e
a
r
Average
Pleasure, Core
Pleasure, Fringe
Pleasure, Other
To Work, Core
To Work, Fringe
To Work, Other
Business, Core
Business, Fringe
Business, Other
This figure shows that crash rates increase with annual mileage within price categories.
The data show that causality crashes (which involve an injury or death) and
comprehensive claims (which involve vandalism, theft, weather damage and glass
damage) also increase with annual vehicle mileage (Figure 8). This indicates that these
types of vehicle insurance require distanced-based pricing to be actuarially accurate.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
8
Figure 8 Comprehensive and Casualty Claims
20%
60%
100%
140%
180%
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
3
5
-
<
4
0
Annual Kilometre Category
C
r
a
s
h
R
a
t
e
s
R
e
l
a
t
i
v
e
t
o
C
l
a
s
s
A
v
e
r
a
g
e
Total Claims
Casualty Claims
Comprehensive Clai ms
This figure indicates that all types of crashes and claims tend to increase with annual vehicle mileage.
Because crashes and claims increase with mileage but premiums do not, motorists who
drive less than average tend to overpay their true insurance costs, while motorists who
drive more than average overpay within their rate category (i.e., motorists with the same
risk ratings who pay the same size premiums for a given level of insurance coverage), as
illustrated in figure 9.
Figure 9 Over- and Underpayment Relative to Rate Category Average
-$300
-$200
-$100
$0
$100
$200
$300
<
5
5
-
<
1
0
1
0
-
<
1
5
1
5
-
<
2
0
2
0
-
<
2
5
2
5
-
<
3
0
3
0
-
<
3
5
3
5
-
<
4
0
Annual Kilometre Category
A
n
n
u
a
l
O
v
e
r
-
o
r
U
n
d
e
r
-
P
a
y
m
e
n
t
This figure illustrates the degree to which vehicles over- or under-pay their true insurance costs
if pricing does not incorporate annual mileage.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
9
Subsequent research provides further evidence of the positive relationship between
mileage and crashes. Using Progressive Insurance Corporation data, Bordoff and Noel
(2008), found a strong positive relationship between mileage and claims. Ferreira and
Minike (2010) used mileage and insurance claim data matched for individual vehicles
totaling 2.8 million vehicle-years. Their analysis found a significant correlation between
miles driven and risk, and confirms that mileage is an accurate predictor of risk,
particularly when normalized for other rating factors. Overall, these studies confirm the
actuarial soundness of PAYD pricing.
Mileage - Crash Relationship Summary
The data show that crash rates increase with annual mileage in virtually all categories.
Mileage is not the only risk factor. It is not necessarily the most important risk factor. But
it clearly has a substantial impact. As a result, within existing rate categories lower
mileage motorists overpay and higher mileage motorists underpay their insurance costs.
A critical question with regard to distance-based insurance is whether mileage reductions
produce comparable reductions in crashes and claims. If not, insurers could face losses,
since revenues decline more than costs. For example, if distance-based pricing causes a
10% reduction in mileage and premium revenue but only a 5% reduction in crashes and
claims, insurers would be financially worse off. This could occur if lower-risk driving is
more price sensitive than higher-risk driving. Some data described above suggest that this
could occur, since marginal per-mile crash rates are nearly flat at very high-mileages,
which implies that the last few thousand miles driven each year by a high-mileage vehicle
has zero risk (in some cases it even suggests that increased mileage reduces crash risk).
However, this reflects crash rates between different vehicles, not the result of mileage
changes by individual vehicles.
All available data indicate that mileage reductions usually do reduce crashes and claims,
and normally provide a proportionally greater reduction in total crash costs and claims
by reducing both the risk of causing a crash and exposure to risks caused by another
motorist. Available evidence indicates that a 10% reduction in mileage typically reduces
total insurance claims by 14% to 18%, although a single insurer with a minor share of the
vehicle insurance market does not capture all of these savings.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
10
Distance-Based Insurance Pricing Options
This section describes four distance-based insurance pricing strategies.
1. Mileage Rate Factor (MRF) (Hundstad, Bernstein and Turem 1994)
Vehicle insurance could become more distance-based by incorporating motorists’
estimates of their annual mileage as a rating factor into the existing price structure. This
would be relatively easy to implement. However, motorists cannot predict with certainty
how much they will drive in the future and tend to underestimate their annual mileage if
they have a financial incentive. As a result, Mileage Rate Factor is inaccurate and can
only apply a small portion of the actuarially justified weight on mileage.
2. Pay-at-the-Pump (PATP) (Sugarman 1993; Wenzel 1994)
Pay-at-the-Pump uses a 25-50¢ per gallon surcharge on gasoline sales to fund basic
vehicle insurance. Table 2 summarizes the risks that are covered. PATP overcharges low-
risk drivers with fuel-inefficient vehicles and undercharges high-risk drivers with fuel-
efficient vehicles relative to their true insurance costs. To address this, most PATP
proposals include additional surcharges on vehicle registrations, drivers licenses and
traffic citations that reflect risk factors.
Table 2 Pay-at-the-Pump Coverage
Typically Covered Typically Not Covered
? Basic liability for collisions by
gasoline-powered vehicles that occur
within the jurisdiction that has
PATP.
? Extended liability.
? Collision
? Comprehensive
? Out-of-jurisdiction travel.
? Vehicles using fuel other than gasoline.
PATP only covers about a third of total insurance premiums; the rest continue to be fixed
price. As a result, it only provides modest reductions in vehicle travel and modest overall
benefits. PATP can cause significant revenue “leakage” from cross-borders and illegal
fuel purchases (5-10% of vehicle mileage could be insured by PATP without paying the
surcharge if a typical state or province implements PATP by itself). This creates a new
inequity, since motorists who pay the surcharge would subsidize the insurance costs of
motorists who avoid it.
PATP provides universal liability coverage for gasoline vehicles, which is attractive in
jurisdictions with high uninsured driving rates. However, losses through cross-border and
illegal fuel purchases would probably more than offset the increased cost recovery of
uninsured driving. Other methods can effectively minimize uninsured driving, such as
integrating vehicle insurance and licensing transactions (vehicle owners must pay for
insurance to obtain license tabs), which has reduced uninsured driving to less than 1% in
some jurisdictions.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
11
3. Per-Mile Premiums (PMP) (Butler 1993; Baker and Barrett 1998; Edlin 2003; Bordoff
and Noel 2008; Ferreira and Minike 2010)
This means that vehicle insurance is sold by the vehicle-mile (or kilometer) rather than
the vehicle-year.
5
Other rating factors are incorporated into this price unit, so higher-risk
drivers pay more per mile than lower-risk vehicles. For example, a $500 annual premium
becomes 4¢ per mile, and a $1,000 annual premium becomes 8¢ per mile.
Motorists would prepay for the miles/minutes they expect to drive during the term, either
in a lump sum or in several payments. For example, some motorists might pay for 12,500
miles at the start of the term, while others might pay for just 5,000 miles at first and make
additional payments as needed. The total premium is calculated at the end of the term
based on recorded mileage. Vehicle owners are credited for unused miles/minutes or pay
any outstanding balance. There are three possible approaches to coverage:
A. Coverage only on prepaid miles/minutes. For example, if a vehicle owner pays for 5,000
miles, they have no coverage at 5,001 miles. This is the simplest approach and is appropriate
for optional coverage, but would result in uninsured driving if applied to mandatory coverage.
B. Coverage regardless of prepayment. Once a driver makes a minimum payment they have
coverage for the policy term (usually a year), and pay for any outstanding miles at the end of
the term. For example, at the start of the term a motorist might pay for 5,000 miles of
coverage but drive 15,000 miles. At the end of the term they would need to pay for the
outstanding 10,000 miles driven in order to reinsure and reregister the vehicle. A problem
with this approach is that motorists could avoid full payment by selling a vehicle outside the
jurisdiction or scrapped it at the end of their term.
C. Coverage regardless of prepayment, with late payment penalties. This combines options A
and B. Basic liability coverage would be provided for all travel during the policy term, but
claims on unpaid miles or minutes would have financial penalties. For example, deductibles
could double for claims that occur past the prepaid number of miles. This would give
motorists an incentive to prepay, and would reduce insurance company’s losses, since drivers
who intend to avoid full payment would be stealing low value coverage.
Per-Mile Premiums requires odometer auditing to collect accurate vehicle-mileage data.
Odometer audits would be performed when a vehicle’s insurance is renewed, in most
cases once a year. Audits involve these steps:
1. Check speedometer and instrument cluster for indications of tampering.
2. Record tire size and check that it is within the specified range.
3. Attach a small seal to the ends of mechanical odometer cables to indicate if it has been
removed. This is unnecessary on most newer vehicles with electronic speedometers.
4. Check odometer accuracy and calibrate with a dynamometer (this is optional and could be
performed on a random basis).
5. Record odometer reading and forward results to the vehicle licensing agency.
5
A variation is to price by the vehicle-minute using an electronic instrument to measure engine operation.
This concept is described in the comprehensive technical report.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
12
Audits take 5-10 minutes and less if performed with other vehicle servicing, estimated to
average $5-10 per vehicle-year. Governments could certify auditors and incorporate
odometer data into their vehicle registration database, or insurance companies could
establish their own odometer auditor networks. Vehicle maintenance shops, emission
inspection stations and some insurance brokers are likely to be certified.
There are concerns that odometer fraud could be a problem, but most tampering can be
detected during audits and crash investigations, and fraud would void coverage.
Odometers are increasingly tamper-resistant. 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. Audits would provide
additional benefits, including accurate mileage data for used-vehicle buyers, and allows
other charges, such as registration fees, to become distance-based at minimal extra cost.
Per-Mile Premiums could be implemented as a consumer option (NOW 1998; Oregon
HB 3871). Motorists would choose between vehicle-year and vehicle-mile premiums, just
as consumers can now choose their telephone service rates. Optional odometer-based
PAYD would probably attract 20-40% of total policies, representing a significant portion
of motorists who expect to drive less than 80% of average annual mileage in their rate
class, representing 10-20% of total mileage. Participation should increase over time as
fixed-rate premiums increase, eventually causing the market to shift to PAYD pricing.
6
Figure 10 illustrates the financial impacts of Per-Mile Premiums on different types of
motorists. A low-cost, low-mile vehicle owned by a low-income motorist might save
$225, an 8.4% reduction in total vehicle expenses. An average motorist saves $64
annually in insurance costs if vehicle travel declines 10% as expected. A high-mileage
motorist pays $331 more per year, a 4.7% increase in total vehicle expenses.
Figure 10 Current and Per-Mile Premiums Annual Costs Compared
$0
$2,000
$4,000
$6,000
$8,000
C
u
r
r
e
n
t
S
a
m
e
M
i
l
e
a
g
e
R
e
d
u
c
e
d
M
i
l
e
a
g
e
C
u
r
r
e
n
t
S
a
m
e
M
i
l
e
a
g
e
R
e
d
u
c
e
d
M
i
l
e
a
g
e
C
u
r
r
e
n
t
S
a
m
e
M
i
l
e
a
g
e
R
e
d
u
c
e
d
M
i
l
e
a
g
e
A
n
n
u
a
l
V
e
h
i
c
l
e
E
x
p
e
n
s
e
s
Insurance
Variable
Fixed
Low Average
High
This compares costs for Low, Average and High mileage vehicles. “Current” refers to vehicles
with fixed-price insurance. “Same Mileage” refers to vehicles with Usage-Based Premiums that
do not reduce annual mileage. “Reduced Mileage” assumes a 10% reduction.
6
The first insurers to offer distance-based pricing are likely to attract many new customers.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
13
4. GPS-Based Pricing (Bomberg, Baker and Goodin 2009)
This system prices insurance based on when and where driving occurs, using a GPS
(Global Positioning System) transponder installed in each vehicle. It can incorporate
virtually any rating factor related to driver, vehicle, time and location of vehicle travel.
For example, an average motorist might pay 7¢ per minute for urban-peak driving, 5¢ for
urban-off-peak driving, and 3¢ per minute for driving in rural areas. A lower-risk
motorist pays less and a higher-risk motorist pays more.
This system typically adds $150 or more in annual costs for equipment, billing and
royalties.
7
Privacy is a concern, although this can be address by controlling how vehicle
location data are processed and stored.
In 1998 the Progressive insurance company introduced a pilot program of this system call
Autograph coverage.
8
It has a $15 per month equipment fee, which allows participants to
obtain other GPS services (panic button, roadside assistance, directional assistance, theft
recovery, remote power door unlock, etc.) at a significant discount. Participants reduced
their mileage more than 13% and saved more than 25% on average compared with
conventional insurance pricing.
GPS-Based Pricing can attract motorists who drive low-mileage vehicles or want other
GPS-based services, and who are not particularly concerned about loss of privacy
(predicted to be 5-10% of current policies). This should increase somewhat over the next
decade as more vehicles are manufactured with GPS transponders, but penetration would
probably stay under 20% due to additional billing costs and privacy concerns.
Summary
The table below summarizes the pricing options evaluated in this report.
Table 3 Summary of Distance-Based Pricing Options
Name Description
MRF Mileage Rate Factor is incorporated into premiums.
PATP
Pay-at-the-Pump uses a fuel surcharge to provide basic insurance coverage
for gasoline-powered vehicles.
Per-Mile, Mandatory All vehicle insurance is priced by the mile or kilometer.
Per-Mile Ins. & Reg. All vehicle insurance and registration fees are priced by the mile or km.
Per-Mile, Optional Motorists may choose between vehicle-year or vehicle-mile premiums.
GPS-Based Pricing
Motorists may choose to purchase insurance based on when and where they
drive using a GPS transponder installed in their vehicle.
This table summarizes the pricing options evaluated in the next section of this report.
7
The Progressive Insurance Company’s U.S. patent number 5,797,134 covers this technology.
8
Progressive Autograph, Progressive Insurance, (www.progressive.com). This program is being studied by
the USEPA (www.epa.gov/projectxl/progressive/index.htm).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
14
Comparison of Distance-Based Insurance Options
This section compares distance-based pricing options by various criteria.
9
1. Actuarial Accuracy
Mileage Rate Factor is constrained by the weight that can be placed on mileage before
self-reported estimates of future travel are unacceptably understated. PATP is constrained
because it uses fuel consumption as a surrogate for vehicle travel and then incorporates
rating factors through fixed (not distance-related) surcharges on vehicle registration and
drivers licenses, resulting in a trade-off between actuarial accuracy and distance-related
pricing. Per-Mile Premiums can incorporate all existing rating factors, significantly
improving actuarial accuracy. GPS-Based Pricing can incorporate existing rating factors
plus travel time and location, and so is the most actuarially accurate pricing option.
2. Implementation Costs
Mileage Rate Factor using self-reported estimates of future travel has the lowest
implementation costs. PATP has moderate to large transition costs, since it requires
reorganizing the entire vehicle insurance system. It could reduce administrative costs for
motorists who only purchase basic insurance, but most drivers would still need to
purchase other coverages, so overall savings would be small.
Per-Mile Premiums require a new rate plan and an odometer auditing system. Most audits
could be performed during other scheduled servicing, with an estimated incremental cost
averaging $6 per vehicle-year. GPS-Based Pricing requires a GPS transponder installed
in each vehicle, a tracking and billing system, plus royalties to use the technology. This is
estimated to cost at least $150 per vehicle-year for most vehicles.
3. Travel Impacts
Table 4 indicates the magnitude of these per-mile costs, and the effects on vehicle travel,
based on standard elasticity values. Figure 11 illustrates the travel reductions.
Table 4 Travel Reduction Impacts
MRF
PATP
Per-Mile
Mandatory
Per-Mile
Ins. & Reg.
Per-Mile
Optional
GPS-
Based
Market penetration 100% 90% 100% 100% 50% 10%
Price increase per mile 0.7¢ 1.4¢ 5.6¢ 6.8¢ 5.6¢ 5.6¢
Reduction per participating vehicle 1.0% 5.0% 10% 12% 13% 15%
Total vehicle travel reduction 1.0% 4.5% 10% 12% 3.7% 0.8%
This table compares the travel impacts of the various distance-based pricing options.
9
Most impacts and benefits described in this section could increase about 10% if vehicle registration fees
also become distance-based.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
15
Figure 11 Distance-Based Insurance Impacts On Vehicle Travel
0%
5%
10%
15%
MRF PATP Per-Mile,
Manditory
Per-Mile Ins.
& Reg.
Per-Mile,
Optional
GPS-Based
Pricing
T
r
a
v
e
l
R
e
d
u
c
t
i
o
n
Per Paricipating Vehicle
Total Reduction
This figure compares travel impacts. Mileage reductions per participating vehicle depend on the
size of the per-mile fee. Strategies with high implementation costs have low penetration rates and
are only chosen by low mileage vehicles, so their total travel reductions are relatively small.
Distance-based insurance could increase vehicle ownership since it reduces fixed costs,
but this is expected to be small (about 1%) and would add little additional vehicle travel.
Most additional vehicles would be a household’s second vehicle, such as an old truck or a
collector car, which would substitute for, rather than add to, existing travel. Only drivers
who purchase a first vehicle due to low fixed insurance costs are likely to drive more, and
the annual mileage will be quite low; otherwise they would have no savings.
Some people suggest that Mileage Rate Factor and Per-Mile Premiums would have little
effect on travel behavior because there would usually be several months lag between a
reduction in mileage and consumers’ financial savings, but this probably has a minor
effect. For example, there is no evidence that households that heat with oil and so pay
infrequently are less motivated to conserve heat (e.g., insulate, close doors and windows)
than households that heat with electricity or gas and pay more frequently.
4. Road Safety
As described earlier in this report, each 1.0% reduction in vehicle mileage reduces total
vehicle crash costs by 1.4% to 1.8%. PATP may provide somewhat smaller reductions in
crash damages if it causes a shift to vehicles with less crash protection, although this
impact is uncertain. Per-Mile Premiums give higher risk motorists an extra incentive to
reduce their driving, and GPS-Based Pricing gives motorists an extra incentive to avoid
higher-risk driving conditions, increasing their crash reductions (Bolderdijka, et al. 2010).
The table below compares predicted crash reductions for the pricing options.
Table 5 Estimate of Road Safety Benefits
MRF
PATP
Per-Mile
Mandatory
Per-Mile
Ins. & Reg.
Per-Mile
Optional
GPS-
Based
Total VMT reduction 1.0% 4.5% 10% 12% 3.7% 0.8%
% Crash reduction per % VMT red. 1.2 1.1 1.4 1.4 1.4 1.6
Total crash reduction 1.2% 5.0% 14.0% 16.8% 5.2% 1.2%
This table summarizes the safety benefits of distance-based insurance.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
16
5. Energy and Emission
Mileage Rate Factor reduces energy consumption and emissions by about 1%. PATP
reduces fuel consumption and CO
2
emissions by 13.5%. Per-Mile Premiums reduce
energy consumption and emissions by 10%, and 12% if registration fees are also
distance-based. GPS-Based Pricing provides an extra incentive to avoid congested
conditions, therefore providing extra energy savings and emission reduction benefits per
participating vehicle. However, its total impacts are small due to its limited penetration.
6. Congestion and Facility Cost Savings
Reductions in vehicle travel tend to reduce traffic congestion, and road and parking
facility costs. Mileage Rate Factor causes small travel reductions and therefore provides
little benefit. PATP causes modest travel reductions and therefore provides modest
benefits. Mandatory Per-Mile Premiums provide the greatest travel reduction and
therefore the greatest benefits, particularly if registration fees are also distance-based.
GPS-Based Pricing provides an extra incentive to avoid congested conditions, but its total
impacts are small due to its limited penetration.
7. Consumer Impact
Distance-based insurance gives motorists a new opportunity to save money. Average
motorists who continue their current driving patterns pay the same as they do now (plus
any implementation costs), while those who drive less save. Mileage reductions represent
consumer benefits; low value vehicle travel that motorists forego in exchange for
financial savings. The greater the travel reduction, the greater the consumer surplus gains.
Figure 12 illustrates the increased variable costs from different distance-based insurance
pricing options. Figure 13 illustrates impacts on total vehicle costs, which are modest
because insurance is a minor portion of total vehicle costs.
Figure 12 Impacts On Variable Vehicle Costs
$0.00
$0.04
$0.08
$0.12
$0.16
$0.20
Mileage Rating
Factor
PATP Per-Mile
Premiums
GPS-Based
Pricing
V
a
r
i
a
b
l
e
C
o
s
t
p
e
r
V
e
h
i
c
l
e
-
M
i
l
e
Prorated Registration Fees
Insurance Charge
Current Variable Costs
This figure compares how each option increases per mile (variable) vehicle costs.
Only about 18% of vehicles are driven more than 15,000 miles annually, indicating that
less than one in five drivers would pay significantly more (i.e., over 10%) with distance-
based premiums. Optional distance-based pricing provides direct consumer benefits since
motorists would only choose it if they considered themselves better off overall.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
17
Figure 13 Comparison of Total Costs By Annual Mileage
$0
$2,000
$4,000
$6,000
$8,000
0 5,000 10,000 15,000 20,000 25,000
Annual Vehicle Mileage
T
o
t
a
l
A
n
n
u
a
l
E
x
p
e
n
d
i
t
u
r
e
s
Current Pricing
Mileage Rate Factor
Pay-at-the-Pump
Per-Mile Premiums
Per-Mile Ins. & Reg.
GPS-Based Pricing
This graph illustrates the effects different pricing options have on total vehicle costs.
8. Equity
Distance-based insurance helps achieve equity by more accurately reflecting crash costs
(horizontal equity) and providing savings and increased choice to lower income
households (vertical equity). Mileage Rate Factor slightly improves equity. PATP
replaces current inequities with new inequities: overcharging lower-risk motorists with
fuel inefficient vehicles who pay the premium, and undercharging higher-risk motorists
with fuel efficient vehicles, and motorists who avoid paying the surcharge. Per-Mile
Premiums provides the greatest overall changes in costs and so provides the greatest
overall equity benefits. GPS-Based Pricing can be most actuarially accurate but its high
implementation costs limit its availability, particularly to lower-income motorists.
9. Affordability
Distance-based insurance increases affordability by allowing consumers to purchase just
as much accident risk as they can afford (Litman 2004a; Brobeck and Hunter 2012).
Mileage Rate Factor provides minimal affordability benefits. PATP provides moderate
affordability benefits. Per-Mile Premiums offer the greatest affordability benefits because
they provide the greatest potential savings. GPS-Based Pricing has high implementation
costs, and so cannot increase affordability for most motorists.
10. Economic Efficiency, Productivity and Development
Distance-based insurance increases economic efficiency by making prices better reflect
marginal costs, and increases productivity by reducing externalities. Mileage Rate Factor
provides minimal benefits. PATP is not actuarially accurate, provides modest externality
reductions and can impose large economic costs on a jurisdiction by increasing cross-
border and illegal fuel sales. Per-Mile Premiums provide the greatest economic benefits
by more accurately reflecting costs and providing large externality reductions,
particularly if registration fees are also distance-based. GPS-Based Pricing has minimal
efficiency benefits due to high costs and modest market penetration.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
18
11. Public Acceptability
There is likely to be strong support for optional distance-based insurance since it
increases consumer choice and gives motorists a new opportunity to save money.
Legislation supporting optional distance-based insurance (Oregon HB 3871) was
endorsed by the National Association of Independent Insurers, regional governments, the
American Automobile Association, the Oregon Consumer League, environmental
organizations, citizen transportation reform groups and the Interfaith Global Warming
Campaign (Hagerbaumer 2001).
Public response to mandatory distance-based insurance is mixed. Citizens generally
support reforms that increase fairness and offer cost savings, and help solve specific
problems, but are skeptical if it may raise costs or burden disadvantaged groups. Citizens
may be uncomfortable with Mileage Rate Factor that relies on unverified mileage data.
PATP appears to be the least popular option because it is perceived as a new fuel tax.
Many objections to Per-Mile Premiums reflect misunderstanding of the concept and
could be addressed by education and program design.
Consumers sometimes prefer the predictability and convenience of fixed prices, such as
all-you-can-eat restaurants and flat-rate telephone service, but this preference is generally
weak. Fixed-rate pricing is relatively uncommon in competitive markets, and some
markets are shifting toward more variable pricing. For example, water utilities increasingly
meter consumption, and electric rates are increasingly time-based. There is no evidence
that consumers have a strong preference for fixed-priced insurance. Given the choice, most
motorists who expect to save money would probably choose distance-based pricing.
Summary
Table 6 summarizes the rating of each price option according to the twelve criteria.
Table 6 Impact Rating Summary
MRF
PATP
Per-Mile
Mandatory
Per-Mile Ins.
& Reg.
Per-Mile
Optional
GPS-
Based
Actuarial Accuracy 1 0 2.5 2.5 2.5 3
Implementation Costs -1 -3 -1.5 -1.5 -1 -3
Fairness 1 0 2.5 2.5 2.5 3
Progressive 1 -1 2.8 3 3 1
Consumer Impacts 1 2 3 3 3 1
Public Acceptability 1 0 2 2 3 1
Travel Impacts 1 2 2.8 3 2 1
Road Safety 1 2 2.8 3 2 1
Congestion Reduction 1 2 2.8 3 2 1
Energy/Emissions 1 3 2.8 3 2 1
Economic Development 1 -2 2.8 3 2 1
Totals 9 5 25.3 26.5 23 11
Rating from -3 (high cost/undesirable) to 3 (highly beneficial/desirable).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
19
Mileage Rate Factor ranks high only in implementation cost. PATP ranks high in energy
conservation/emission reductions, and medium in several categories due to its moderate
travel reduction. Mandatory Per-Mile Premiums rank high in most categories because
they cause a large cost shift and a large reduction in total vehicle travel, which increase
further if registration fees are also distance-based. Optional Per-Mile Premiums rates
lower in some categories due to its lower market penetration, resulting in smaller total
vehicle travel reductions and associated benefits. GPS-Based Pricing can incorporate the
most rating factors and so is most actuarially accurate, but its market penetration is
limited, resulting in a relatively small reduction in total vehicle travel, and little increase
in affordability. As a result its overall ranking is relatively low.
Figure 14 illustrates a benefit-cost analysis results. All six provide benefits that exceed
incremental costs. Mileage Rate Factor has minimal implementation costs but vehicle
travel impacts and overall benefits are small. PATP provides moderate benefits and high
costs due to fuel tax revenue losses, and so has the lowest Benefit/Cost ratio. Mandatory
Per-Mile Premiums have large total benefits, which increase if registration fees are also
distance-based. Optional Per-Mile Premiums cause smaller total vehicle travel reductions
and so benefits are modest. GPS-Based Pricing has minimal penetration and the highest
per-vehicle implementation costs, and so has the smallest net benefits.
Figure 14 Summary of Total Benefits and Costs
($50)
$0
$50
$100
$150
$200
$250
$300
$350
M
R
F
P
A
T
P
P
e
r
-
M
i
l
e
M
a
n
d
a
t
o
r
y
P
e
r
-
M
i
l
e
I
n
s
.
&
R
e
g
P
e
r
-
M
i
l
e
O
p
t
i
o
n
a
l
G
P
S
-
B
a
s
e
d
P
r
i
c
i
n
g
P
e
r
V
e
h
i
c
l
e
A
n
n
u
a
l
B
e
n
e
f
i
t
s
&
C
o
s
t
s
Traffic safety benefits
Congestion reduction
Road and parking facility
cost savings
Consumer surplus
Pollution reduction benefits
Transition costs
Equipment/audit costs
Fuel tax/surcharge
revenue losses
This figure illustrates monetized benefits (above the line) and costs (below the line).
Both mandatory and optional Per-Mile Premiums have Benefit/Cost ratios that exceed 25.
Even if costs were far greater than predicted (for example, if odometer auditing cost $20-
40 annually per vehicle, rather than the $5-7 that is predicted), each of the five benefits
would individually provide net benefits. This indicates that even under a worst-case
scenario, with much greater costs and lower benefits than predicted, implementation of
Per-Mile Premiums is still cost effective.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
20
Consumer Impacts
Distance-based insurance pricing gives motorists a new opportunity to save money if they
reduce their mileage. People sometimes misunderstand the source of these savings; they
assume that the savings represent cost shifts, so each dollar of savings to motorists who
reduce their mileage requires an additional dollar paid by higher mileage motorists. This
is untrue. Much of the savings reflect true cost reductions provided by reductions in
crashes and therefore insurance claim costs. With current insurance pricing, motorists
who reduce their mileage provide savings that benefit their insurance company or all
motorists in their rate class, with distance-based insurance individual motorists receive
the savings that result when they reduce their mileage.
Since DBVI offers a new opportunity for savings, the mileage reductions provide
consumer benefits. For example, if a motorist who shifts to distance-based insurance with
10¢ per vehicle-mile premiums responds by reducing their vehicle travel 10%, or 1,200
annual vehicle-miles, as models predict, we can surmise that these miles foregone have
an incremental value to that motorist ranging between 0¢ and 10¢. If those miles were
worth less than 0¢ (they provide no incremental consumer benefit), they would not be
driven in any case. If they consider those miles worth 1-9¢, the additional 10¢ per mile
savings will convince them to give it up, they would rather have the money. If the
additional mile is worth more than 10¢ per mile, a 10¢ per mile savings is inadequate to
convince motorists to forego that mile, they will continue driving. Of the 1,200 miles
foregone, we can assume the average consumer surplus (net consumer benefit) is the mid-
point of this range, that is, 5¢ per vehicle-mile. Thus, we can calculate that miles
foregone by a 10¢ per vehicle-mile premium have an average consumer surplus value of
5¢, or a $60 overall increase in consumer surplus (1,200 miles times $0.05 per mile).
Under most scenarios, distance-based insurance would be a consumer option, so
individual motorists could choose the pricing structure that best meets their individual
needs just as consumers can choose various price structures for telephone and internet
services (per minute, a bundle of minutes, or unlimited usage). This reflects the principle
of consumer sovereignty, the idea that consumers benefit from having diverse goods
(including different types, qualities, and price options) from which they can choose the
combination that best meets their needs.
To the degree that lower-mileage motorists overpay their true insurance costs and cross-
subsidize higher mileage motorists, distance-based pricing may eventually increase
premiums for conventional (flat-rate) policies, as more lower-annual-mile motorists shift
to distance-based policies. Such increases should be gradual and predictable, with a few
percent of motorists shifting to the new price structure each year, forcing insurers to raise
flat-rate premiums a few percent a year. This will raise the annual mileage point at which
motorists consider distance-based insurance attractive. These price increases reflect the
actual costs of insuring higher-annual-mileage vehicles and so reflect increases in
economic efficiency and equity. Bordoff and Noel (2008) estimate that in the U.S.,
lower-annual-mileage motorists overpay an average of $318 annually compared with
what is actuarially accurate, and PAYD would provide direct net savings to about two-
thirds of all motorists.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
21
Responses to Concerns About Per-Mile Insurance
This section discusses concerns that have been raised about distance-based pricing.
Insurance pricing already incorporates mileage.
Some insurance companies incorporate mileage-related rate factors such as commute distance or
estimated annual mileage, but none begins to approach actuarially accurate, marginal pricing, so
they fail to give motorists accurate price signals.
Mileage is less important in predicting crashes than other rating factors.
Insurance industry claims that annual mileage is not a significant risk factor based on inaccurate,
self-reported data. New research based on independently-collected mileage data shows a strong
relationship between mileage and crashes. Whether mileage is more or less important than other
risk factors is irrelevant for DBVI pricing that incorporates other rating factors. Although it
would not be actuarially accurate to use mileage instead of other rating factors (for example, to
charge all motorists the same 6¢ per mile for insurance), actuarial accuracy increases significantly
if mileage is added to other rating factors, so for example, a lower-risk motorist pays 3¢ per mile
and a higher risk motorist pays 12¢ per mile).
Travel foregone could be lower risk than average, resulting in little crash reduction, and
less insurance cost savings than reduced premium revenue.
This concern is technically valid, although there is no evidence that it is true. Available evidence
indicates that DBVI reduces both high and low risk travel, and broad vehicle travel reductions
result in proportionally greater crash reductions and insurance savings. Additional research and
pilot projects that test the effects of distance-based pricing could address this concern.
DBVI pricing increases costs to low-income motorists.
DBVI provides significant savings and benefits to most lower-income motorists, including those
who currently drive less than average, those who drive somewhat more than average but will
reduce their mileage in response to this price incentive and so save money, those who currently
drive uninsured because they cannot afford insurance, and those who currently cannot afford to
own an automobile due to high insurance costs until DBVI becomes available. Butler (2000)
describes how fixed insurance pricing creates a spiral of rising premiums and uninsured driving
rates that harm low-income communities.
DBVI pricing unfairly increases costs to high-mileage drivers.
DBVI increases premiums for motorists who drive significantly more than average within their
rate class. This is justified on actuarial grounds, and so increases fairness. Most motorists save
money and benefit overall, particularly lower-income motorists, who tend to drive less than
average within their rate groups.
DBVI pricing unfairly increases costs to rural residents.
Since territory is a rate factor, only rural motorists who drive significantly more than the average
among rural residents would pay more. For example, motorists average 12,000 annual miles but
rural motorists average 15,000, so rural residents who drive 14,000 annual miles would save
money—although this is more than the state average—because it is less than the rural average.
Automobile insurance reform should focus on equity, affordability and safety.
DBVI pricing helps achieve all of these goals. It increases equity by making premiums more
actuarially accurate. It makes vehicle ownership more affordable and provides financial savings,
particularly for lower income motorists. It also significantly increases road safety.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
22
There are other ways to achieve safety, mobility, energy conservation and environmental goals.
It is unnecessary to choose between DBVI pricing and other strategies. Distance-based pricing
complements other strategies. Because of its multiple benefits, DBVI insurance can be one of the
most cost-effective ways to achieve these objectives.
People need their cars too much to give them up. There will be no travel reduction.
DBVI is not expected to cause people to give up cars. There is extensive evidence vehicle
operating costs affect vehicle travel activity. A 5-15% mileage reduction is projected based on
standard motorist price responses.
Consumers will not accept this change.
Market surveys and pilot projects indicate significant consumer demand for distance-based
pricing. A broad range of interest groups support DBVI pricing. Support should increase as
consumers and citizens learn more about this concept.
Odometer fraud will be a major problem.
Although some fraud may occur, it should be minor overall, with fraud rates comparable to other
common consumer transactions, and far lower than with current insurance pricing based on self-
reported predictions of future mileage. Odometers are increasingly tamper resistant, regular
odometer audits should discourage tampering, and the financial incentive for fraud is relatively
low. Insurers’ financial exposure would be minimal since odometer fraud voids coverage.
It increases administrative costs to insurers and inconvenience vehicle owners.
Although any price change adds short-term transition costs, these are minor, and tiny compared
with total benefits. Odometer audits should cost $5-$15, and less if performed in conjunction with
scheduled maintenance such as an oil change or emission inspection.
This type of pricing has never been used before.
Some vehicle insurance is already distance-based: rates for fleets and commercial vehicle
coverage are often based on mileage. Several insurers now offer DBVI policies. There is nothing
unique about pricing based on use. Prices for most goods are based on some measure of
consumption, such as water and electric meters, and scales used to weigh food. Vehicle rentals
and leases incorporate odometer-based price components. Vehicle insurance is unusual for having
pricing that allows unlimited consumption (i.e., vehicle mileage).
DBVI pricing would be an invasion of privacy.
Odometer auditing does not identify when or where a vehicle has been driven, or provide any
other information that could be considered private. Odometer readings are already collected
during vehicle servicing, vehicle sales and crash investigations. Odometer readings are even sold
by private companies to used vehicle purchasers. Odometer auditing simply standardizes the
collection of this information. Odometer auditing would provide additional benefits. For example,
it would prevent odometer fraud by used vehicle sellers (since a reliable record of past odometer
readings would be easily available) and provide data useful for transport planning.
Some DBVI systems do track when and where a vehicle is driven, and so may raise legitimate
privacy concerns. However, this would be a consumer option, and these systems can be designed
with controls over how the vehicle location data are processed and stored, as with other personal
data such as telephone calls and credit card transactions. Many motorists already choose to collect
this information for security and auditing purposes.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
23
Table 2 Obstacles and Potential Solutions
Obstacle Potential Solutions
Misunderstandings. Many objections to DBVI pricing
reflect misunderstandings of the concept. Some people
believe it refers to Pay-At-The-Pump (insurance
coverage funded through a fuel sales surcharge), are
unaware of its full potential benefits, or have
exaggerated estimates of its costs.
Educate stakeholders (policy makers, insurance
professionals, insurance regulators, consumers) about
DBVI, including how it would be implemented, and its
real benefits and costs.
Uncertainty. Current rate structures are based on claim
cost data collected by the vehicle-year. Although there
is ample evidence that mileage is an important risk
factor, actuaries have insufficient data to know exactly
how to calculate mileage-based premiums.
Begin with a relatively small pilot project, using a basic
prorated premium (i.e., current annual premiums divided
by average annual mileage for each rate class), with an
extra 5-15% margin to account for uncertainty. Adjust
this rate as needed as the pilot project provides data.
Data accuracy. DBVI requires accurate mileage data.
Self-reported data is unreliable.
Mileage data can be collected in many ways. The
cheapest is for motorists to report odometer readings,
verified with occasional spot-checks. The most costly is
to install GPS transponders in each participating vehicle.
An intermediate approach, which may provide the
optimal balance between accuracy and cost, is to certify
businesses (emission stations, service stations, and
brokers) to perform odometer audits.
Exaggerated number of losers. Some people object to
DBVI because they believe it would harm many
groups, such as rural drivers (DBVI, as recommended
here, would only increase costs for rural motorists who
drive more than the average for rural motorists) or
businesses (premiums for business vehicles already
reflect their relatively high mileage).
Educate stakeholders about DBVI insurance real
distributional impacts. To the degree that it is effective at
reducing mileage and crash costs, most people should
benefit overall. Even high mileage drivers can benefit
overall if they prefer owning multiple vehicles, and due
to reduced exposure to traffic congestion, accident risk
and pollution emissions.
Regulatory constraints. Some insurance regulations
discourage pricing reforms. For example, regulators
often require insurers to provide data justifying rates,
and some prohibit insurers from offering multiple rate
structures. Regulations are complex and rate filings are
costly (often costing a million dollars or more in data
collection, analysis and paper works), which
discourages small, innovative pilot projects.
Educate insurance regulators concerning the merits of
DBVI with respect to insurance regulatory objectives.
Collect data showing the actuarial basis for DBVI. Work
with regulatory agencies to address specific obstacles to
innovation and small pilot projects. Identify jurisdictions
that have suitably supportive regulatory policies. Pass
legislation (as in Oregon and Texas) which specifically
allows DBVI insurance pricing.
Lack of incentive. Insurance companies currently
perceive little incentive to implement innovative
pricing options such as DBVI pricing.
Educate insurance company officials concerning
opportunities to profit from DBVI pricing (the first
companies to offer this product should attract significant
new business). Provide financial incentives, such as tax
breaks (as Oregon now does). Pass laws requiring
insurance companies to offer DBVI, at least as an option.
Fund DBVI research programs and pilot projects. Favor
insurance companies that offer DBVI pricing in
government contracts.
This table lists various obstacles to DBVI pricing, and potential solutions to them.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
24
Examples and Case Studies
MileMeter (www.milemeter.com)
MileMeter is a private insurance company which began selling PAYD insurance policies in Texas
in 2008. All policies are valid for the amount of miles purchased or a six (6) month period.
Policies are purchased by the Internet. Motorists report their odometer reading when they
purchase a policy. This information is cross-referenced with odometer readings from vehicle
emission, maintenance, and registration databases nationwide to insurance accuracy.
Coverbox (www.coverbox.co.uk/index.php)
Coverbox is an Internet-based brokerage firm that uses mileage recording device installed in
vehicles to calculate insurance and theft tracking. Policy mileage rates vary depending on when a
vehicle is driven, with off-peak, peak and super-peak. Motorists pay premiums based on their
projected future driving patterns. At the end of the policy term the rates are adjusted to reflect
actual driving during that period; motorists receive a rebate if their actual mileage is less than
projected or pay for any additional mileage charge needed. Several insurance companies
including Co-operative, Allianz and Equity Red Star offer Coverbox PAYD policies.
Real Insurance PAYD (www.payasyoudrive.com.au)
Starting in 2008, Real Insurance began offering Pay-As-You-Drive vehicle insurance in Australia.
Motorists report their odometer reading at the beginning of the policy term and purchase a certain
number of kilometers. Odometer readings are verified if there is a claim, giving motorists an
incentive to be accurate (false readings void coverage). Any unused kilometers are either
refunded if motorists cancel or don’t renew (upon verification of vehicle odometers if requested
by the company) or carried over to the next policy. If kilometers exceed prepayment the policy
only provides basic coverage (liability, fire and theft). Policy holders can easily purchase
additional kilometers at any time. This program was awarded Australia’s Cheapest Car Insurance
award by Money Magazine. A Magazine spokesperson said, “In these tough times consumers
need to reduce costs wherever they can and shopping around for car insurance is a must. Money
Magazine is pleased to be able to recognise and reward the best products and services –
particularly at a time where it’s so critical for consumers to rein in their spending.”
PAYD in State Emission Reduction Plans
Of 33 state climate action plans evaluated by the New America Foundation Climate Policy
Program, twelve include PAYD as a transportation emission reduction strategy, as summarized in
www.newamerica.net/files/State%20Climate%20Policy%20Tracker%205-4-09.xls. These states
include: AZ, CA, CO, MD, ME, MN, NH, NM, NC, RI, VA, and VT. The degree of emphasis
and support for PAYD varies. For example, the Rhode Island plan, while endorsing the
importance of the strategy, explicitly says that the state will likely wait for other states to figure
out how to promote PAYD insurance before it does so. Justin Horner of the National Resources
Defense Council described this analysis in the following blog:http://switchboard.nrdc.org/blogs/jhorner/thirteen_states_say_ok_lets_ha.html
PAY PER K Coverage (www.nedbank.co.za).
Nedbank, a major South African insurer, now offers Pay Per K vehicle insurance, which bases
premiums on monthly mileage. Pay per K monitors the distance a vehicle is driven each month
by means of a NedFleet card that is linked to the vehicle’s comprehensive motor insurance. Each
time the vehicle is refueled an odometer reading is recorded and used to calculate a monthly
insurance bill. Monthly premiums will fluctuate depending on the distance traveled in the
preceding month, and are debited monthly in arrears. This means motorists only pay for those
times when their vehicle is actively on the road and therefore most at risk.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
25
Polis Direct Kilometre Policy (www.kilometerpolis.nl)
Polis Direct (www.polisdirect.nl), a major Dutch insurance company, began offering their
“Kilometre Policy” in November 2004. Participating motorists must be at least 24 years of age,
have a car that sold new for less than €42,000 (euros), and drive less than 40,000 kms annually.
Per-kilometer premiums are calculated by dividing current premiums by the current policy’s
maximum annual kilometers, which is typically 20,000, so a motorist who currently pays €500
for up to 20,000 kilometers would pay €0.025. Participants pay an “advance premium,” which is
90% of their current premiums, so those who currently pay €500s under this system pay an
advance premium of €450. At the end of the policy term the motorist receives a rebate of up to
50% of their premium for lower mileage (in this case, a rebate up to €250 if they drive less than
10,000 kms), or their premiums can increase up to 50% if they drive more than the current
maximum (in this case, they could pay up to €750 if they drive 30,000 kilometers during the
policy year. If this motorist drives 20,000 kilometers they pay an extra €50, so their total
premium is the same as with a standard policy. In the following years the advance premium is
calculated based on the number of kilometers actually driven the previous year. Mileage is
calculated using odometer readings collected during annual vehicle inspections, called the
“national car card,” and recorded in the national vehicle registration database.
Holland PAYD Coverage (www.payasyoudrive.co.za).
Holland Insurance (www.hollard.co.za), South Africa’s largest insurer, offers Pay-As-You-Drive
vehicle insurance. Monthly premiums are based on the distance traveled in the preceding month.
Mileage is automatically recorded a Skytrax GPS tracking device. An article by the Mail &
Guardian’s Personal Finance columnist Maya Fisher-French explains, based on her own
experience, how this system allows motorists to save money by reducing their mileage
(www.payasyoudrive.co.za).
Progressive MyRate (www.progressive.com/MyRate/myrate-default.aspx)
The Progressive insurance company offers MyRate policies which provide discounts based on
based on when, how much and how a vehicle is driven. Cars that are driven less often, in less
risky ways and at less risky times of day can receive large discounts. Participating motorists
receive a MyRate device which they plug into their vehicle's On-Board Diagnostic (OBDII) port,
which records how much, how fast and when the vehicle is driven. This information is used to
calculate discounts the customer may receive when they renew their policy. The device reports
driving information by wireless communication.
PAYD As An Emission Reduction Strategy (USDOT 2010)
A Report To Congress produced by the U.S. Department of Transportation on potential
transportation emission reduction strategies ranked distance-based insurance as one of the
most effective, and by far the most cost effective way to reduce energy consumption and
pollution emissions out of several dozen evaluated.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
26
Conclusions
This study investigates the feasibility, benefits and costs of distance-based (or pay-as-
you-drive) vehicle insurance, how it can be implemented, and the experience where it has
been implemented.
Considerable research indicates that annual crash rates and claim costs tend to increase
with annual vehicle mileage. Annual mileage is one of several factors that have a
significant impact on annual crash rates. It would not be actuarially accurate to use
mileage instead of other rating factors, for example, to charge all motorists the same per-
mile insurance fee, but actuarial accuracy improves significantly if annual mileage is
incorporated in addition to existing rate factors. Any other price structure overcharges
low-mileage motorists and undercharges high-mileage motorists within each price class.
Distance-based insurance reflects the principle that prices should be based on costs. It
does not simply shift costs from one group to another. It gives consumers a new way to
save money by returning to individual motorists the insurance cost savings that result
when they drive less. This lets motorists limit their insurance costs by limiting
consumption, as with most other consumer goods. Motorists who continue their current
mileage would be no worse off on average then they are now (excepting additional
transaction costs), while those who reduce their mileage could save money. These result
in net savings to motorists and net benefits to society.
Distance-based insurance is technically and economically feasible. Several insurers have
successfully implemented distance-based pricing programs. Distance-based pricing can
help achieve several public policy goals, including actuarial accuracy, equity,
affordability, road safety, consumer savings and choice, reduced traffic congestion, road
and parking facility cost savings, and environmental protection. It can reduce the need for
cross-subsidies currently required to provide “affordable” unlimited-mileage coverage to
high-risk drivers.
Distance-based insurance can provide significant safety benefits. Because most crashes
involve multiple vehicles, reduced vehicle mileage can cause a proportionally greater
reduction in crash costs and insurance claims. Some types of distance-based insurance
give higher-risk drivers an extra incentive to reduce mileage, and some give motorists an
extra incentive to avoid higher risk travel conditions. As a result, each 1.0% reduction in
total mileage caused by distance-based insurance can reduce total crash costs by 1.4% to
2.0%. Distance-based insurance could reduce total crashes by 15% or more.
Distance-based pricing can provide substantial benefits to lower-income motorists. Since
annual vehicle mileage tends to increase with income, fixed-price insurance tends to
cause lower-income motorists to subsidize the insurance costs of higher-income motorists
within their rate class. Distance-based insurance pricing provides overall savings to
lower-income motorists, and would allow some low-income households to insure a
vehicle used for basic mobility that they currently cannot afford.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
27
This study evaluated several distance-based pricing options:
1. Mileage Rate Factor (MRF) incorporates an annual mileage rate factor into the existing rate
system. It is the easiest option to implement, but is constrained by the weight that can be
placed on self-reported mileage estimates. Its travel impacts and benefits are small.
2. Pay-at-the-Pump (PATP) funds basic insurance coverage through a surcharge on fuel sales. It
is not actuarially accurate because payments are based on vehicle fuel consumption, not risk
factors. Less than half of insurance payments would be distance-based, and cross-border and
illegal fuel purchases could be major problems. It causes a relatively large reduction in fuel
consumption but modest reductions in vehicle travel, providing modest overall benefits.
There would probably be little administrative cost savings because motorists would still need
to pay registration fees and purchase optional coverage as they do now.
3. Per-Mile Premiums change the unit of exposure from the vehicle-year to the vehicle-mile,
incorporating all existing rating factors. They require odometer audits to provide accurate
mileage data, predicted to cost an average of $6 per vehicle-year. This could be mandatory or
a consumer option. Per-Mile Premiums significantly improve actuarial accuracy and provide
significant consumer savings, particularly to lower income households. Because they cause
large vehicle travel reductions they provide large benefits. As a consumer option they are
predicted to attract 25-50% of motorists within a few years, and more over time.
4. Per-Minute Premiums use a small electronic meter to record when an engine operates,
predicted to cost $30 per year. This allows rates to vary by time of day. Because it can give
motorists an extra incentive to reduce their peak-period travel it can provide even greater
benefits than Per-Mile Premiums, but the additional equipment costs reduce the net benefits.
As a consumer option it is predicted to attract 12-25% of motorists within a few years.
5. GPS-Based Pricing uses GPS (Global Positioning System) technology to track vehicle travel,
allowing insurance prices to reflect when and where a vehicle is driven in addition to existing
rating factors. It is predicted to cost $150 or more per vehicle-year and raises privacy
concerns. Installation costs may decline somewhat in the future as more vehicles have
factory-equipped GPS transponders. It is most actuarial accurate and can cause the greatest
crash reduction per participating vehicle. However, its high equipment costs offset the direct
benefits for most consumers. As a consumer option it is predicted to attract 10% or less of
total motorists, so total benefits would be modest for the foreseeable future.
Table 22 summarizes the implementation costs and effectiveness at achieving various
objectives for the seven distance-based pricing options considered in this study.
Table 8 Summary of Distance-Based Pricing Options
Implementation Costs Effectiveness
Mileage Rate Factor Low Low
Pay-At-The-Pump High Medium
Per-Mile Premiums, Mandatory Low High
Per-Mile Premiums, Optional Low Medium
Per-Minute Premiums, Mandatory Medium High
Per-Minute Premiums, Optional Medium Medium
GPS-Based Pricing High Low
This table summarizes overall implementation costs and effectiveness at achieving objectives.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
28
This analysis indicates that Mandatory Per-Mile Premiums provide the greatest net
benefits, due to relatively low costs and high effectiveness at achieving objectives (Parry
2004 and Babiuk 2008 reach similar conclusions). It provides direct financial savings and
net benefits to most motorists, and less than one in five would perceive significantly
higher insurance costs. These benefits increase further if vehicle registration fees are also
mileage-based. Optional distance-based pricing results in greater direct consumer benefits
per participating vehicle, but smaller total benefits due to low market penetration and the
low average mileage of motorists who would choose it. However, market penetration is
predicted to increase over time as it becomes more financially attractive compared with
fixed-rate premiums.
Because Per-Minute Premiums and GPS-Based Pricing provide an extra incentive to
reduce peak-period driving they can provide extra congestion and pollution reduction
benefits. This might justify partial subsidy of these options, depending on the value
placed on these incremental benefits. However, more research is needed to evaluate the
incremental costs, travel impacts, and social benefits.
Distance-based insurance pricing has two different types of effects on consumers. It
provides savings to motorists who currently drive less than their price-group average,
which represents a reduction in their current cross-subsidies to higher-mileage motorists
within their price group. These are economic transfers that are justified on equity grounds.
In addition, there are overall savings and benefits that result as motorists reduce their
mileage, which reduce total crash costs, insurance costs, congestion, road and parking
facility costs, and environmental impacts. These are resource cost savings, which are
justified on economic efficiency grounds.
There is likely to be strong support for optional distance-based insurance pricing since it
increases consumer choice and gives individual motorists a new opportunity to save
money. Consumers are accustomed to being able to choose from various rate structures
for many types of goods, such as telephone service, Internet service, and air travel. If
cross-subsidies are not allowed between the different pricing pools, an increasing portion
of motorists would switch to it over time.
There is mixed public support for mandatory distance-based insurance. Citizens generally
support pricing that increases fairness and affordability, and helps solve specific
problems, but are skeptical of reforms that may be less convenient, increase costs, or
burden certain groups. PATP appears to be the least popular option. Usage-Based
Premiums appears to have about equal levels support and opposition, with responses
affected by the concept is presented. If described as a reward to consumers who use
alternative modes it tends to have a positive response, but if presented as a surcharge on
higher-mileage motorists it tends to have a more negative response.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
29
Under some circumstances consumers seem to prefer fixed prices, because they are
predictable and minimize transaction costs. However, this preference appears to be weak.
Fixed-rate pricing is relatively uncommon in competitive markets, and some markets are
shifting toward more marginal pricing. There is no evidence that consumers have a strong
preference for fixed-priced insurance. Given the choice, most motorists who expect to
save money would probably choose optional distance-based insurance.
Many of the concerns raised about distance-base pricing reflect misunderstanding of the
concept, and so can be addressed with public education. Insurers have five legitimate
financial concerns about distance-based insurance.
1. It is possible that the mileage foregone will be lower than average risk. As a result, premium
revenue could decline more than claim costs.
2. Optional distance-based pricing could attract motorists with relatively high per-mile claim
costs.
3. With optional distance-based pricing, motorists in multi-vehicle households could shift
driving from vehicles with distance-based premiums to those with fixed premiums.
4. Total premiums would probably decline, assuming distance-based pricing is successful at
reducing claims. Although revenue reductions would be offset by reduced claim costs, this
would reduce investment income, which could reduce insurance company profits.
5. Some motorists may try odometer fraud to steal insurance. However, odometers are
increasingly tamper-resistant, and most types of fraud could be detected during annual audits
and crash investigations. Odometer auditing should provide data comparable in accuracy to that
used in other common commercial transactions.
Offsetting these financial risks is the fact that a percentage reduction in mileage usually
provides a proportionally greater reduction in claims. Available empirical evidence
suggests that each 1% reduction in mileage typically causes a 1.4-1.8% reduction in
claims, making insurers financially better off. This increases the net savings from
distance-based pricing and reduces the financial risks to insurers.
These concerns can be addressed by implementing distance-based pricing pilot projects
to obtain information on feasibility, costs, consumer demand, travel impacts, crashes, and
revenue impacts. These could start small, and if no major problems are encountered they
could expand until all motorists are offered distance-based pricing.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
30
References And Resources For More Information
AAA (annual reports), Your Driving Costs, American Automobile Association
(www.ouraaa.com), various years. Based on Runzheimer International data.
Michelle Babiuk (2008), Distance Based Vehicle Insurance: Actuarial And Planning Issues, B.A.
(Hon), Masters Thesis, Community and Regional Planning, University of British Columbia; athttp://circle.ubc.ca/bitstream/handle/2429/752/ubc_2008_spring_babiuk_michelle.pdf.
Dean Baker and Jim Barrett (1998), The Feasibility of Pay by the Mile Automobile Insurance,
Economic Policy Institute (www.epinet.org).
J.W. Bolderdijka, J. Knockaertb, E.M. Stega and E.T. Verhoefb (2010), “Effects of Pay-As-You-
Drive Vehicle Insurance On Young Drivers’ Speed Choice: Results Of A Dutch Field
Experiment,” Accident Analysis and Prevention, Vol. 43, pp. 1181–1186.
Matthew Bomberg, Richard T. Baker and Ginger Goodin (2009), Mileage?Based User Fees – A
Path toward Implementation; Phase 2: An Assessment of Technology Issues, UTCM 09-39-07,
Texas Transportation Institute (http://utcm.tamu.edu); athttp://utcm.tamu.edu/publications/final_reports/Goodin_tech_09-39-07.pdf.
Jason E. Bordoff (2008), Pay-As-You-Drive Car Insurance, Brookings Institution
(www.brookings.edu/articles/2008/spring_car_insurance_bordoff.aspx).
Jason E. Bordoff and Pascal J. Noel (2008), Pay-As-You-Drive Auto Insurance: A Simple Way to
Reduce Driving-Related Harms and Increase Equity, The Brookings Institution
(www.brookings.edu); at www.brookings.edu/papers/2008/07_payd_bordoffnoel.aspx.
Stephen Brobeck and J. Robert Hunter (2012), Lower-income Households and the Auto Insurance
Marketplace: Challenges and Opportunities, Consumer Federation of America
(www.consumerfed.org); at www.consumerfed.org/news/450.
Patrick Butler (1992), Operation of an Audited-Mile/Year Automobile Insurance System Under
Pennsylvania Law, Cents Per Mile Now (www.centspermilenow.org); at
www.casact.org/pubs/forum/93sforum/93sforum.pdf.
Patrick Butler (2000), Why The Standard Automobile Insurance Market Breaks Down In Low
Income Zip Codes, Report to the Texas House Committee on Insurance; at
www.centspermilenow.org/633b-4522.pdf. Also see “Pay-per-Mile Auto Insurance” Consumer
Economic Issues in America, (2003); at www.centspermilenow.org/652Garma.pdf.
Cambridge Systematics (2006), Mileage-Based User Fee Demonstration Project: Potential
Public Policy Implications of Pay-As-You-Drive Leasing and Insurance Products, Final report
2006-39C, Minnesota Department of Transportation (www.lrrb.org); at
www.lrrb.org/pdf/200639C.pdf.
CAS (1996), Foundations of Casualty Actuarial Science, 3
rd
Edition, Casualty Actuarial Society
(Arlington; www.casact.org).
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
31
CDI (2008), Insurance Commissioner Poizner Sets Framework For Environmentally–Friendly
Automobile Insurance, Increased Options For Consumers, California Department of Insurance
(www.insurance.ca.gov); at www.insurance.ca.gov/0400-news/0100-press-releases/0070-
2008/release089-08.cfm.
Cents Per Mile For Car Insurance (www.centspermilenow.org) is a website that promotes “cents
per mile” vehicle insurance as allowed by legislation passed in the state of Texas in 2001.
Ceres (2009), Drive Less, Pay Less: Environmental and Transportation Groups Unveil
Performance Standard for Pay-As-You-Drive Auto Insurance, Ceres Investors and
Environmentalists for Sustainable Prosperity (www.ceres.org); at
www.ceres.org/Page.aspx?pid=1157.
Harry Clarke and David Prentice (2009), A Conceptual Framework For The Reform Of Taxes
Related To Roads And Transport, School of Economics and Finance, La Trobe University, for the
Australia Treasury Australia's Future Tax System review; athttp://apo.org.au/research/conceptual-framework-reform-taxes-related-roads-and-transport.
Stephen J. Dubner and Steven D. Levitt (2008), “Freakonomics: Not-So-Free Ride,” New York
Times, April 20, 2008, (www.nytimes.com/2008/04/20/magazine/20wwln-freakonomics-t.html).
Aaron S. Edlin (2003), “Per-Mile Premiums for Auto Insurance,” Economics for an Imperfect
World: Essays In Honor of Joseph Stiglitz, MIT Press; at:http://works.bepress.com/aaron_edlin/28.
Aaron S. Edlin and Pinar Karaca Mandic (2006), “The Accident Externality from Driving,”
Journal of Political Economy, Vol. 114, No. 5, pp. 931-955; athttp://works.bepress.com/aaron_edlin/21.
Environmental Defense PAYD Website (www.edf.org/page.cfm?tagID=31651) provides
information on a campaign to promote pay as you drive vehicle insurance.
ETAAC (2008), Recommendation of the Economic and Technology Advancement and Advisory
Committee (ETAAC), Economic and Technology Advancement Advisory Committee, California
Air Resources Board (www.arb.ca.gov); at www.arb.ca.gov/cc/etaac/ETAACFinalReport2-11-
08.pdf.
Exigen (2008), Pay-Only-As-You-Drive Survey, Exigen Insurance Solutions; at
www.exigeninsurance.com/fsp/enews/Exigen_PAYD_Survey_Report.pdf.
Joseph Ferreira Jr. and Eric Minike (2010), Pay-As-You-Drive Auto Insurance In Massachusetts:
A Risk Assessment And Report On Consumer, Industry And Environmental Benefits, by the
Department of Urban Studies and Planning, Massachusetts Institute of Technology
(http://dusp.mit.edu) for the Conservation Law Foundation (www.clf.org); at www.clf.org/our-
work/healthy-communities/modernizing-transportation/pay-as-you-drive-auto-insurance-payd.
Keri Funderberg, Michael Grant and Ed Coe (2003), “Changing Insurance One Mile At A Time,”
Contingencies (www.contingencies.org/novdec03/changing.pdf), Nov./Dec. 2003, pp. 34-38.
Ginger Goodin, Richard T. Baker and Lindsay Taylor (2009), Mileage?Based User Fees – A Path
toward Implementation; Phase 2: An Assessment of Institutional Issues, UTCM 09-39-07, Texas
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
32
Transportation Institute (http://utcm.tamu.edu); athttp://utcm.tamu.edu/publications/final_reports/Goodin_inst_09-39-07.pdf.
Allen Greenberg (2009), “Designing Pay-Per-Mile Auto Insurance Regulatory Incentives,”
Transportation Research D, Volume 14, Issue 6, August, pp. 437-445; earlier version at
www.vtpi.org/07-3457.pdf.
Randall Guensler, Adjo Amekudzi, Jennifer Williams, Shannon Mergelsberg and Jennifer Ogle
(2003), “Current State Regulatory Support for Pay-as-You-Drive Automobile Insurance
Options,” Journal of Insurance Regulation, National Association of Insurance Commissioners
(www.naic.org) Volume 21, No. 3, Spring 2003.
Christine Hagerbaumer (2001), Oregon Environmental Council (www.oeconline.org).
Robin Harbage (2009) Usage Based Insurance-From Theory to Practice, Casualty Actuarial
Society (www.casact.org); at www.casact.org/education/rpm/2009/handouts/harbage2.pdf.
Winston Harrington and Ian W.H. Parry (2005), “Pay-As-You-Drive Car Insurance,” New
Approaches on Energy and the Environment, Resources for the Future (www.rff.org); at
www.rff.org/Documents/08_New_Approaches/09-Pay-As-You-Drive-for-Car-Insurance.pdf.
Edward Huang, Henry Lee, Grant Lovellette and Jose Gomez-Ibanez (2010), Transportation
Revenue Options: Infrastructure, Emissions, and Congestion, Belfer Center, Harvard Kennedy
School (www.belfercenter.org/enrp); athttp://belfercenter.ksg.harvard.edu/files/Transportation Revenue Options Workshop%
20Report%202010%20for%20web.pdf.
Lyn Hundstad, Robert Bernstein and Jerry Turem (1994), Impact Analysis of Weighting Auto
Rating Factors to Comply with Proposition 103, Ca. Dept. of Insurance (www.insurance.ca.gov).
ICF Incorporated (1997), Opportunities to Improve Air Quality Through Transportation Pricing
Programs, USEPA (www.epa.gov).
Mary Janke (1991), “Accidents, Mileage, and the Exaggeration of Risk,” Accident Analysis &
Prevention, Vol. 23, No. 3, pp. 183-188.
Per Kågeson and Jos Dings (1999), Electronic Kilometre Charging for Heavy Goods Vehicles in
Europe, European Federation for Transport and Environment (www.t-e.nu).
King County (2007), King County Gets $1.9 Million To Test Drive Innovative Statewide Car
Insurance Program, (www.kingcounty.gov); athttp://your.kingcounty.gov/exec/news/2007/0327payasdrive.aspx.
Todd Litman (1997), “Distance-Based Vehicle Insurance as a TDM Strategy,” Transportation
Quarterly, Vol. 51, No. 3, Summer, pp. 119-138; at www.vtpi.org/dbvi.pdf.
Todd Litman (2001), Distance-Based Vehicle Insurance Feasibility, Benefits and Costs:
Comprehensive Technical Report, VTPI (www.vtpi.org); at www.vtpi.org/dbvi_com.pdf.
Todd Litman (2004), Pay-As-You-Drive Pricing For Insurance Affordability, VTPI
(www.vtpi.org); at www.vtpi.org/payd_aff.pdf.
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
33
Todd Litman (2004b), Transportation Cost and Benefit Analysis, Victoria Transport Policy
Institute (www.vtpi.org).
Todd Litman (2005), “Pay-As-You-Drive Pricing and Insurance Regulatory Objectives,” Journal
of Insurance Regulation, Vol. 23, No. 3, National Association of Insurance Commissioners
(www.naic.org), Spring; at www.vtpi.org/jir_payd.pdf.
Todd Litman (2007), Pay-As-You-Drive Pricing in British Columbia: Backgrounder, VTPI
(www.vtpi.org); at www.vtpi.org/paydbc.pdf.
Todd Litman (2007), Win-Win Emission Reduction Strategies: Smart Transportation Strategies
Can Achieve Emission Reduction Targets And Provide Other Important Economic, Social and
Environmental Benefits, VTPI (www.vtpi.org); at www.vtpi.org/wwclimate.pdf.
Todd Litman (2008), Pay-As-You-Drive Insurance: Recommendations for Implementation, VTPI
(www.vtpi.org); at www.vtpi.org/payd_rec.pdf.
Todd Litman (2011), Pay-As-You-Drive Vehicle Insurance in British Columbia, Pacific Institute
for Climate Solutions (www.pics.uvic.ca); at
www.pics.uvic.ca/assets/pdf/publications/PAYD%20Insurance_May2011.pdf.
Todd Litman and Steven Fitzroy (2005), Safe Travels: Evaluating Mobility Management Traffic
Safety Impacts, VTPI (www.vtpi.org); at www.vtpi.org/safetrav.pdf.
METRO (2007), Pay-as-You-Drive (PAYD) Insurance Pilot Project, King County Metro
(www.metrokc.gov/exec/news/2007/pdf/Payasyougofacts.pdf).
MetroMile (www.metromile.com) began offering policies in Oregon in 2012. It uses an electronic
device that plugs into a vehicle data port to track daily mileage which is used to calculate monthly
insurance bills. The company estimates that most motorists who drive less than 10,000 annual
miles will save with this policy.
MVMA (1995), Facts and Figures 95, Motor Vehicle Manufacturers Association.
NAIC (various years), Average Expenditures and Premiums for Personal Automobile Insurance,
National Association of Insurance Commissioners (www.naic.org/store_pub_statistical.htm).
NCTCOG (2008), Pay As You Drive (PAYD) Insurance Pilot Program, Progressive County
Mutual Insurance Company and the North Central Texas Council of Governments
(www.nctcog.org); at www.nctcog.org/trans/air/programs/payd/index.asp.
NMA (1998), Position on Auto Insurance, National Motorists Association
(www.motorists.org/insurance).
NOW, Congress Can End Overcharging By Auto Insurers; Per Mile Auto Insurance Option Act,
National Organization for Women (www.now.org/issues/economic/insurance).
Oregon Environmental Council PAYD campaign (www.oeconline.org/our-
work/climate/transportation/payd)
Distance-Based Vehicle Insurance
Victoria Transport Policy Institute
34
Ian W. H. Parry (2004), “Comparing Alternative Policies to Reduce Traffic Accidents,” Journal
of Urban Economics, Vol. 54, No. 2 (www.elsevier.com/locate/jue), September, pp. 346-368.
Ian W.H. Parry (2005), Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than
Gasoline Taxes?, Resources for the Future (www.rff.org/Documents/RFF-DP-05-15.pdf).
Ian W. H. Parry, Margaret Walls and Winston Harrington (2007), Automobile Externalities and
Policies, Discussion Paper 06-26, Resources for the Future (www.rff.org); at
www.rff.org/rff/Documents/RFF-DP-06-26-REV.pdf.
Sightline (2003), NEW Facts: Pay-As-You-Drive Car Insurance, NorthWest Environment Watch
(www.sightline.org/research/sust_toolkit/solutions/payd).
Stephen Sugarman (1993), “Pay at the Pump” Auto Insurance, Ins. of Gov. Studies (Berkeley).
TNO (2003), “Pay As You Drive” In The Netherlands, TNO Inro, Institute for Traffic and
Transport (www.inro.tno.nl/doc.php?nr=1436).
USDOT (2010), Transportation's Role in Reducing U.S. Greenhouse Gas Emissions: Volume 1,
Report to Congress, U.S. Department of Transportation (www.dot.gov), athttp://ntl.bts.gov/lib/32000/32700/32779/DOT_Climate_Change_Report_-_April_2010_-
_Volume_1_and_2.pdf.
USEPA (1998), Technical Methods for Analyzing Pricing Measures to Reduce Transportation
Emissions, US Environmental Protection Agency #231R98006 (www.epa.gov/clariton).
William Vickrey (1968), “Automobile Accidents, Tort Law, Externalities and Insurance: An
Economist’s Critique,” 33 Law and Contemporary Problems, pp. 464-470; at
www.vtpi.org/vic_acc.pdf.
Tanja Vonk, Marten Janse, Jos Dings and Huib van Essen (2003), Pay As You Drive (PAYD):
Scope for a Variable Car Insurance Premium in the Netherlands? CE Delft
(www.rapportsysteem.nl/artikel/index.php?id=235&action=read).
VTPI (2004), Online TDM Encyclopedia, VTPI (www.vtpi.org).
Tom Wenzel (1995), Analysis of National Pay-as-you-Drive Insurance Systems and other
Variable Driving Charges, Energy & Environment Division, Lawrence Berkeley Laboratory; at
www.osti.gov/energycitations/product.biblio.jsp?osti_id=125357.
“Usage Based Insurance,” Wikipedia (http://en.wikipedia.org/wiki/PAYD).
Steve Winkelman (2007), Travel Demand and Urban Form: Lessons and Visions, Asilomar
Conference on Transportation and Climate Policy, 22 August 2007; at
www.its.ucdavis.edu/events/outreachevents/asilomar2007/presentations/Day%201%20Session%2
03/Winkelman%20Intro%20to%20Asilomar%20Demand%20Session%20(8.22.07).pdf.
www.vtpi.org/dbvi.pdf
doc_236423175.pdf