State Farm, Automobile Club Offer Pay-As-You-Drive Coverage in California

State Farm and the Automobile Club of Southern California will be the first companies in the state to offer pay-as-you drive coverage, insurance protection with premiums based on precisely how many miles policyholders drive. Insurers say the option will help them more accurately match premiums with risk for policyholders who voluntarily choose the pay-as-you-drive plans.

The program allows automobile insurance policies to be based on actual miles driven, verified through various methods.

If consumers want to volunteer to go into a verified mileage program where they provide their odometer reading, they can reduce the number of miles that they drive and receive discounts on their auto insurance, said California Insurance Commissioner Steve Poizner. They can either call it in or use more automated means like OnStar.

"It has broad appeal, based on the fact that you can get 10 to 15% discounts, if you sign up for the mileage verification program and drive less," Poizner said.

The mileage program will result in rates that are more accurately tied to driving experience, said Christopher Baggaley, senior vice president of insurance operations at the Automobile Club.

It's an idea that has been around for awhile, but hasn't yet caught fire in the industry. In 2008, MileMeter, a Texas auto insurer, became what it said was the first insurer in the United States to sell policies strictly by the mile. Designed for low-mileage motorists, it relied on self-reporting and odometer readings from vehicle emission, maintenance and registration databases. A 2008 Brookings Institution study concluded if all drivers paid per mile, driving would decline by 8% nationwide, saving $50 billion to $60 billion each year (BestWire, Nov. 17, 2008).

State Farm will offer an initial 5% discount for the first six-month policy term to drivers who agree to self-report their odometer readings at the beginning and end of each policy period, said State Farm spokesman Bob Devereux. Insured drivers can report odometer readings online, with their agents or allow State Farm to access their mileage data automatically through the OnStar system in General Motors Co. vehicles.

State Farm currently has 3.3 million auto policies in force in California. The insurer estimates 25% of its policyholders may select the pay-as-you-drive option, Devereux said, which would result in a saving to policyholders of $31 million.

State Farm said policyholders who drive less than 19,000 miles a year can save by enrolling in the program. The company has created 39 mileage bands, with 19,000 miles being the highest, and bands dropping in 500-mile increments. Most of the time, the savings will be 1% to 2% for every 500 fewer miles driven. Odometer readings will be validated through external vendor sources whenever possible.

Under the Automobile Club's verified mileage program, drivers can report their odometer readings at the beginning and end of each policy period or agree to plug in a small telematics device into their vehicles that will automatically record the number of miles driven, Baggaley said.

The Auto Club, an affiliate of the American Automobile Association, estimates policyholders' potential savings at between 1% and 10.5%, depending on how much they drive. Policyholders who choose to verify their mileage will pay an average of $68 per vehicle less than those who don't participate in the program.

State Farm's program, which it is marketing as Drive Safe & Save, begins on Feb. 28, 2011. The Automobile Club's program begins on Feb. 1.

Poizner approved the pay-as-you-drive regulations last year (BestWire, Oct. 19, 2009).

Samuel Sorich, president of the Association of California Insurance Companies, said the program has the potential to stir competition, if it is embraced by drivers and insurers.

"Certainly it offers another competitive tool," Sorich said.

Progressive had expressed interest in considering the pay-as-you-drive plans for California but isn't participating at this time.

"Current California regulations let insurance companies offer pay-as-you-drive programs based only on the number of miles a person drives, and recent regulatory changes give insurance companies more flexibility in how they verify the number of miles driven, including using technology like ours. However, Snapshot (Progressive's voluntary program) is based on driving habits," Progressive spokeswoman Leah Knapp said in an e-mail. "Because the regulations currently restrict rating to just mileage, we’re still evaluating how Snapshot could work in California."

Snapshot offers discounts of up to 30% for drivers who drive less and verify good driving habits through an electronic device attached to their cars.

To hear the entire interview with Poizner, visit http://www.ambest.com/media/media.asp?RC=180810.

(By Diana Rosenberg, senior associate editor, BestWeek)