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State Farm shines sun on California pay-as-you-drive car insurance
State Farm Mutual Automobile Insurance Co. will be the first to sell pay-as-you-drive auto insurance in California if its proposed new rate program is approved by state insurance commissioner Steve Poizner. A number of car insurance companies already offer some form of pay-as-you-drive insurance in nearly 20 different states, but their products have not yet been approved in California. For more, read how to control your own car insurance costs: Pay as you drive.
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State Farm's "Drive Safe and Save" rating program establishes car insurance rates based on actual mileage driven rather than estimated annual mileage. Company officials said drivers would get a discount for signing up for the program, and then their mileage will be recorded either through an OnStar telematics system or self-reported by drivers on the Internet every six months.
State Farm spokesperson Bob Devereux said the company, which also offers a pay-as-you-drive policy in Ohio, hopes to begin selling California policies in September 2010, although California Department of Insurance officials said they aren't sure when they would finish reviewing State Farm's application. Devereux said State Farm will continue to offer traditional auto insurance policies but is eager to test the pay-as-you-drive market in California.
"Pay as you drive is another option for drivers, and it helps us better match price to risk," Devereux said. "It's a program we think our customers will find innovative."
How pay-as-you-drive works
After signing up for the program, drivers who don't have OnStar (which comes exclusively on GM vehicles) will report their odometer readings every six months at renewal time. After a year's worth of data is recorded, the driver's car insurance rates will be adjusted if mileage was low. According to California, consumers who cut their driving by as little as 500 miles a year will earn reduced rates.
Although State Farm will allow drivers to self-report mileage, the new California regulations allow car insurance companies offering PAYD policies to:
- Check the odometer themselves
- Hire vendors, such as smog-check technicians, to record it
- Deploy an automatic recording device on the vehicle
Poizner proposed new pay-as-you-drive (PAYD) regulations for California in September 2008 and they were approved by the California Office of Administrative Law in October 2009. Poizner endorsed the insurance strategy as a means to reduce congestion, pollution, emissions, oil consumption and the cost of driving. The new regulations don't prohibit insurance companies from continuing to offer traditional auto insurance quotes based on estimated mileage and other factors.
Although Poizner described the rule changes as "cutting edge," nearly 20 states already allow some form of pay-as-you-drive auto insurance policies, and many states' regulations are less restrictive than California's.
For instance, in California, car insurance companies can collect only mileage data. Other states with PAYD regulations allow auto insurance companies to collect additional information -- such as driving habits, hard braking and the time of day -- in calculating a driver's car insurance premiums.
How car insurance rates are determined
Many factors affect your car insurance rates, including your age and driving record, the type of car you drive and where you live. These will still apply to PAYD policies.
But the importance of mileage in your price varies by company and generally insurers don't actually monitor the miles you drive. They just take your word for it. In fact, lying about mileage is the top lie told to car insurance companies, according to Quality Planning Corp. See the other biggest lies told to car insurance companies.
According to a 2008 Brookings Institute study, lower auto insurance premiums are just the beginning of the savings that can come from a PAYD system. If all motorists in the United States had PAYD auto insurance (and thus had financial incentive to drive less), researchers estimate that driving would decline by 8 percent, carbon emissions would decline by 2 percent and oil consumption would decline by about 4 percent. About two-thirds of all households would pay less for auto insurance -- a savings of $270 per car annually -- and society as a whole would save $50 billion to $60 billion it currently loses in "driving-related harms."
Get PAYD for not driving
Most PAYD programs utilize a data-logging device that is inserted into an onboard diagnostic port found in most cars built after 1996. The data, which can include not only your mileage but also your driving habits, time of day and other factors, is transmitted wirelessly to your insurance company. The insurer typically applies a discount, if you’re eligible, at your next renewal. In Alabama, for example, Progressive customers can review their own driving profile online, analyze the records of their trips and project future discounts.
Aggressive drivers who drive a lot, tend to swerve, slam on the brakes, drive after midnight when the accident rate is high, and speed might find themselves with higher auto insurance rates.
Progressive puts on brakes in California
Progressive has been a leader in the PAYD trend, offering its MyRate program in 19 states. But it’s still evaluating whether it wants to sell its MyRate policies in California because the state restricts data collection to only miles traveled. Progressive, using a small device plugged into a car's diagnostic port, also collects information about driving habits like hard braking and the time of day when driving takes place.
"We think our method gives us a very effective and accurate way to track not only how many miles a person drives but also how safely those miles were driven," says Richard Hutchinson, general manager of Progressive's usage-based insurance division. "Our experience has shown that the number of miles a person drives is mildly predictive of a person's risk of being involved in an accident, but mileage plus driving behavior is even more so. . . . We're still evaluating how MyRate could work in California."
According to Poizner, studies have shown that if 30 percent of Californians participate in PAYD coverage, by 2020 the state would:
- Reduce carbon dioxide emissions by 55 million tons
- Take the equivalent of 10 million cars off the road
- Reduce gasoline consumption by 5.5 billion gallons
- Save Californians $40 billion in car-related expenses
State Farm's Devereux said it's still "too early to tell" how many of its California customers will switch to his company's "Drive Safe and Save" PAYD program. Customers will still be able to return to a traditional car insurance policy if they prefer, but he thinks many customers will take advantage of the chance to save money -- even if it means driving less.
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