State Farm Applies for First ‘Pay-As-You-Drive’ Policies in California

State Farm became the first automobile insurer in California to apply to offer a pay-as-you-drive policy with rates based on actual miles driven, instead of estimated mileage.

Regulations to allow such policies went into effect October 2009 (BestWire, Oct. 19, 2009). The state Department of Insurance has not notified State Farm Automobile Insurance Co. of when it expects to rule on the application, but the company hopes to begin offering policies in September, spokesman Bob Devereux said.

Through the "Drive Safe and Save" program, State Farm will offer policies with premiums based on 45 mileage segments of 500 miles each, Devereux said. Drivers who enroll in the program will see an unspecified "participation discount," with future savings based on actual miles driven, as assessed every six months. Each increment will provide potential savings to drivers, he said.

"The fewer the miles driven, the more savings for the policyholder," Devereux said. "It's an innovative program -- an innovative opportunity."

State Farm offers a similar program in Ohio, but it is only available to clients of General Motors' OnStar system. In California, mileage will be reported automatically via OnStar or will be self-reported by policyholders who are not OnStar users, Devereux said.

Insurers will be permitted to offer discounts to drivers who opt to purchase mileage-verification policies. Insurers could verify miles driven through a variety of potential methods, including odometer readings taken by the insurer, an agent or designees; smog check stations; auto repair shops; self-reporting by the policyholder; or, an electronic device placed in the vehicle. The final regulations explicitly prohibit insurers from using a technological device to gather vehicle location data for rating purpose (BestWire, Oct. 19, 2009).

Regulations include authorization for insurers to offer a price per mile, or prepaid mile option for drivers; a requirement that any insurer offering a pay-as-you-drive plan must specify when filing with the department the exact types of mileage verification the insurer will accept; and a requirement that any insurer offering a pay-as-you-drive plan must make all mileage verification methods available equally to all applicants and insured drivers with a mileage verification policy.

State Farm Group currently has a Best's Financial Strength Rating of A++ (Superior).

The top five writers of private passenger auto insurance in California in 2008, according to BestLink, were: Farmers Insurance Group, with a 15.9% market share; State Farm Group, 12.9%; Mercury General Group, 9.4%; Auto Club Enterprises Insurance Group, 9.0%; and Allstate Insurance Group, 8.4%. BestLink provides online access to A.M. Best's Global Insurance & Banking Database.

(By Sean P. Carr, Washington Correspondent: [email protected])