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Travel Behavior and Pay-as-You-Drive Insurance
Just about anyone who has paid to fill up a gas tank can appreciate how variations in driving costs can affect an individual's travel choices. When gas prices rise, like they did during the summer of 2008, people often find alternatives to driving in order to save money. Some people may group their shopping and work trips, while others might dust off an old bicycle for getting around the neighborhood, and some may start using transit alternatives more often for their commute.
Variable costs like gas -- that is, costs that only increase with additional car use -- are usually the primary factor that people consider when weighing how to get to work or to their next destination. Most other costs are either infrequent or unexpected (e.g., maintenance and repair) or fixed and the same regardless of car use (e.g., insurance, registration, car payments). Such fixed costs are usually considered only if one is deciding whether to purchase a car in the first place, not when deciding whether or not to make a certain trip.
Converting some of these fixed costs to variable costs can encourage drivers to internalize the real cost of driving, which might lead to forgoing some trips or a shift to non-motorized modes. One strategy to do so is a mileage-based insurance pricing system known as "pay-as-you-drive" (PAYD) insurance. Some insurance companies offer the PAYD pricing system because accident rates and insurance claims increase with the amount of miles driven and other usage factors, which the companies track for individuals who choose to enroll. This allows car owners to swap their traditional fixed-cost insurance for a variable-cost plan, meaning the less they drive, the more they save. A 2008 study by the Brookings Institution found that total driving could be reduced by as much as eight percent if all drivers paid for insurance by the mile.
In December 2010, California granted regulatory approval for PAYD insurance. State Farm expected premiums would be reduced by up to 45 percent for those who rarely drive, as reported by SF.Streetsblog. In Illinois, State Farm offers a limited PAYD option for OnStar-equipped vehicles, but other programs available nationally are not yet approved in our state.
Pay-as-you-drive auto insurance helps to further many of the goals of GO TO 2040. By converting the fixed costs of insuring a car to a variable cost, PAYD creates incentives for policyholders to conserve their auto travel. Reducing total vehicle miles traveled, or VMT, helps to reduce congestion, encourages alternative modes like walking and transit, and improves air quality as well. Furthermore, PAYD can help to reduce household transportation costs in our region, one of the livability goals of GO TO 2040 that is also promoted through increasing commitment to public transit. By providing more options to consumers, PAYD insurance shows promise to advance both the public and private good.