I went to a Department of Insurance workshop yesterday to talk about what’s been dubbed “Pay as you drive” insurance. What that means depends on who you ask, and just about every opinion was thrown against the wall at yesterday’s meeting.
Here at Consumer Watchdog, we think the idea is to make insurance rates fairer (and help reduce greenhouse gases while we’re at it) by more closely tying insurance premiums to how far a person drives. After all, if people knew that every 500 miles they drove hiked their insurance premium, they’d have a strong incentive to drive less. (Download our comments to the Department of Insurance here.)
The best way to make sure people pay less for driving less is to make the steps between mileage categories (the number of miles per year that you drive) much more precise. Right now, an insurance company can set mileage tiers as wide as they want to. For example: one insurance company has just two mileage categories – above and below 7,500 miles. So, a 12,000 mile-a-year driver would have to cut 4,500 miles from his annual trips in order to see his premium go down for reducing his driving. That kind of huge driving reduction is difficult for most drivers, so they have no reason to drive less.
More mileage rating categories – with corresponding premium changes – will allow consumers to see directly how a change in driving habits can lower their insurance costs. The Department of Insurance can create a “Green Seal of Approval” to certify those programs that aggressively connect premiums to miles driven.
But the insurance lobbyists and one environmental group (Environmental Defense Fund) argued that insurance companies should have as much "flexibility" as possible when setting up these plans. Reading between the lines, flexibility sounds to me like it means no guarantee that drivers will pay less if they drive less, or that insurance rates will remain fair.
For example, one scheme would allow insurers to charge drivers different premiums depending on whether they estimate or verify their mileage. We have no problem with requiring drivers to prove how far they drove at the end of the year. But if the insurance company doesn’t require proof, it isn’t fair to charge different premiums to two people who both drive the same miles, with the only difference being that one estimates and one verifies.
Another idea would let insurers charge drivers differently based on whether they use a technological device to verify their mileage. This would also create a unfair system where two drivers who are otherwise the same would pay a different premium. Take one driver who installs a GPS monitor in his car that tells his insurance company that he drove 5,000 miles at the end of the year. A second driver verifies the 5000 miles he drove by having his odometer checked by his insurance agent at the end of the year. Especially in the case of technology, which a driver may not want because of privacy concerns, or may not be able to use because his car is too old, it is unfair to penalize one for verifying his mileage in a different way.
Creating two classes of insurance customers who are otherwise equal (as both of these plans would) is illegal under Proposition 103’s fair rate requirements.
In fact, either of these programs – either discounts based on the use of technology, or based on whether a driver estimates or verifies – could easily create a situation where a driver who verifies or accepts the technology could drive more, but pay less, than a driver who reduces her mileage but estimates or doesn't use the device.
In the end, a PAYD program must ensure that discounts or different premiums are based on a driver actually reducing his mileage as required under Proposition 103, not simply on whether a consumer participates in a verification plan, or if the consumer accepts a technological device in order to track her mileage.
The possibility of installing technology in peoples' cars also brings up a host of privacy concerns: Should Californians be forced to pay higher premiums if they want to protect their privacy and reject technology? AB 2800, a bill by Assemblyman Jared Huffman, would invite the spyware in. What kind of data do insurance companies really want to collect? They're already using a huge range of information - like speed, location and time of day - in different parts of the country and across the world. I’ll get to all these issues later - click here for the link when I do.