Pay Per Mile Insurance 1

Pay Per Mile Insurance

Davenport University, Dearborn

Capstone 799

Instructor:

Craig Barton, Ph.D., P.E.

By

Fayyaz Zahid
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Table of contents

1. Abstract

2. SECTION I: DEFINITION OF PROBLEM

Statement of Problem

Purpose of study

Limitations of study

3. SECTION II: RIVIEW OF THE LITRATURE

Related literature review topics

Insurance Rates

Beneficial to the type of consumer

Reduction in Road Crashes

Provides Choices

Improved Rating Accuracy

Reduction in Energy Consumption

Improvement in Environmental Quality

Decrease in Road Congestion

Reducing Parking Problems

Saves $s

Research Cost

Training Cost

System Set up Cost

Difficulties in Mileage Records

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Mixed Public Support

Opposition from the high-mile driver

Insurers are concern of their profits

Why industry itself did not use this concept

Elapses in continued coverage’s

Cancellation and renewal notices

Political opposition

Implementation

4. SECTION III: METHODOLOGY

Independently collected data

Survey

Interviews

5. SECTION IV: ANALYSIS OF THE DATA

Result of the survey

Result of the interviews

6. SECTION V: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

Summary

Conclusion

Recommendations

References
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Abstract

High insurance cost is one of the serious financial problems that today’s drivers are

facing. It appears to be that in the current time based insurance system the insurance

companies are charging premiums for the risk of driving while the vehicles are parked.

Independent surveys and interviews of the insurance customers were conducted. The

literature and available reports on the topic were utilized also. Distance-Based auto

insurance rating could be an answer to the problem discussed because it measures the

distance of the risk being insured.

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SECTION I: DEFINITION OF PROBLEM

In state of Michigan, the law requires automobiles to be legally insured to drive

on public roads. Insurance is offered by several private insurance companies or by the

State of Michigan through the Pool called JUA, also known as Joint Underwriters

Association. The auto insurance is offered using only one rating system which is based

on time. The rising cost of insurance is burdensome on the drivers.

Statement of Problem

1.1 million drivers are driving without insurance. Insurance companies are rating

the driving risk while vehicles are parked. It could get worse if nothing better is offered

to make it affordable.

Purpose of study

1.1 million Drivers are driving uninsured in the State of Michigan alone. The root

cause for increase in total number of uninsured drivers in the State of Michigan is the

soaring cost to insure a vehicle. Insurance companies should realize that there is

something seriously wrong with the insurance products being offered because a high

number of drivers are unable to pay for insurance.

This state’s insured drivers in 2001 paid $65 million in surcharges to cover

the medical bills of passengers in uninsured autos. But that’s just a fraction of the

total cost. The cost of treating injured drivers of uninsured cars is picked up by
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hospitals and other insurance programs, including forms of welfare. That means

higher insurance premiums and taxes for all Michigan residents. (Detroit News,

2003)

The insurance companies and other agencies should pay attention to the reason

why 101 million drivers are uninsured. Could it be that the system being used to rate the

risk is unfair or too harsh?

Limitations of study

The primary and secondary sources are used to conduct this study. Independent

surveys and direct personal interviews on individual basis of current auto insurance

customers are the primary sources. Books, reports, magazines, newspapers, and articles

from the internet were used as secondary sources. Since it is a fairly new concept and

there weren’t enough studies done in the United States alone, some of the data was used

from England and Canada also.

SECTION II: REVIEW OF THE LITERATURE

Everyone who drives in the state of Michigan on the public roads must keep a

valid proof of insurance. Because of the soaring costs to insure a vehicle, many drivers

buy insurance on installments and pay the minimum required payment to start the policy

on a payment plan which could be good for six months to a year in most cases. Those

newly insured drivers then cancel the insurance policy or let it cancel for non-payment,
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which puts unfair burden on the rest of the law abiding drivers who properly insure their

vehicles. Due to the problem of uninsured drivers, insurance companies are losing money

on premiums collected and are passing their losses to the consumer. This is one of the

reasons why the costs of insuring an automobile are going up. The insurance industry

should invest into finding affordable ways to insure the risk of driving and one of the

options they can offer is distance-based insurance. In this concept, one can insure the

miles estimated to be driven, instead of paying for the time the vehicles are parked in the

traditional time-based insurance system. The State of Texas along with few other states is

already looking into finding alternative pricing, as a matter of fact, Norwich Insurance

Company, in England, and a few other insurance companies in Canada are already testing

distance-based pricing pilot program.

Related literature review topics

In Forbes magazine, an article enquired,

Econ 101 says that when something is free, people consume too much. In this

case, all you can drive insurance encourages people to drive more than they

otherwise would if they had to pay the full cost of each mile. The heavy drivers

don’t bear the total costs related to their actions—hospital bills, body-shop bills,

highway low mileage drivers (e.g., women, who drive half as much as men) get

raw deal (Ayres & Nalebuff, 2003).

The list below is the benefits that pay per mile insurance system will provide:

1. Increased insurance affordability

2. Ideal for retirees, stay home mothers, unemployed workers etc.

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3. Reduces road crashes. It creates an incentive for young drivers to drive less which

will ultimately decrease crashes and provide added peace to the parents of those

young motorists.

4. It gives a choice to the motorist to choose between the two systems; whichever

they may find suitable to their needs. It will create an option to insure the

secondary vehicle under pay per mile pricing system and the main vehicle in the

traditional system if they choose it to be suitable.

5. Much more accurate actuarial cost determining to charge the premium on the

individual driver’s bases. Less driving drivers will pay less and a driver with high

driving mileage will pay accordingly.

6. Gives incentive to reduce driving mileage.

7. Reduction in driving will result in fewer crashes and fewer insurance claims.

8. Reduces the energy consumption.

9. Helps improve environmental conditions

10. Decreases the congestions on the roads.

11. Most of all it saves money to those who deserve to save.

Definitely there are cost and other concerns that are associated with Pay per mile

plan:

1. Research cost

2. Implementing cost

3. Operating system set up cost.

4. Difficulties in determining the amount of the mileage to insure.

5. Mixed political support.

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6. Unsure consumer of the benefits of this pay per mile rating system.

7. Opposition from those motorists who are or may end up paying more due to their

high driven mileage.

8. Insurers concern of decreasing their profits.

Let’s discuss the above-mentioned benefits and implementing difficulties as well as the

concern raised above.

Insurance Rates

Rating an insurance policy or individual risk is a very complicated process. Some

of the basic information that is used to estimate the risk being insured in an automobile

policy includes, age, the type of the vehicle being insured, driving and claims records, the

area the vehicle is being park, how the vehicle is being used, prospect’s credit worthiness,

and amount & type of the coverage required.

The Texas Department of Insurance posted an article on their website

www.tdi.state.tx.us in February 2005 titled “Automobile Insurance Price Comparisons”.

In the article regarding the understanding of rates, it states that,

Auto insurers evaluate your risk for a claim using your driving record and

numerous other factors, including the type of car you drive, the area where you

live, your claim history, your credit score, your age, and how you use your car

(business, pleasure, or to drive to work). Your rates are based on your risk for a

claim. Accidents tickets or claims can increase your rates. If you have accidents,

tickets, or claims on your record during the past three years, your rates may be

higher” (Texas Department, 2005)

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C. Henn of Rockville, MD writes in an article prepared for The Institute for the

Analysis of Global Security (IAGS) called, “DISTANCE BASED AUTO INSURANCE:

A TOOL FOR OUR TIMES” page 1, “Currently most insurance policies provide a tiny

reduction in rates for people who claim to drive fewer miles. Since they don’t verify these

claims, they don’t provide more than a couple percentage points off premiums” (Henn,

2003, p.1).

The current motor vehicle insurance rating system is economically insufficient,

because prices do not reflect an equal burden onto the drivers who drive more miles. It

actually benefits those drivers and does not consider those drivers who drive occasionally

or not at all and puts them on a disadvantage. It cannot be a fair rating system.

The Victoria Transport Policy Institute states, in the TDM Encyclopedia,

Converting Vehicle Insurance Premiums Into Use-Based Charges Mileage-Based

Insurance, Per-Mile Premiums and Insurance Variabilization means that a

vehicle’s insurance premium is based directly on how much it is driven. The more

you drive the more you pay and the less you drive the more you save. This can be

done by changing the unit of exposure (i.e., how premiums are calculated) from

the vehicle-year to the vehicle-mile/kilometer or vehicle-minute (Victoria

transport Policy Institute).

In the current insurance rating system, one has none or very little control over the

cost. If one pays little attention to all of one’s auto expenses, it will not be too difficult to

realize that most of the vehicle related costs are fixed. For example, monthly payments of

the vehicle, depreciation, annual taxes, registration and plate fees etc. The current auto
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insurance system is a fixed cost which is why the introduction of this idea to pay per mile

insurance rating system will convert this fixed cost to a variable cost which will benefit

the customers and give them control over their insurance cost.

In the act enacted by the LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Subchapter A, Sec. 1. DEFINITIONS.

“Mile-based rating plan” means a rating plan for which a unit of exposure

is one mile traveled by the insured motor vehicle”.

“Time-based rating plan” means a rating plan for which a unit of exposure

is a unit of time” (Texas Legislature online).

Beneficial to the Type of Consumer

In general, most people will enjoy the benefits of this system. The list especially

includes seniors, students, stay home mother or spouses, low income consumers, laid off

workers and drivers with more than one vehicle. It would also benefit insurance

companies by receiving fewer claims because of the reduced driving the consumer will

anticipate in striving to save on insurance premiums. It will give opportunities to more

drivers to drive insured vehicles, which means more business to insurance companies.

Ultimately reduction in driving will benefit the environment by burning less fuel to drive

the vehicles, save lives because of the reduced numbers of accidents, road maintenance,

and congestions on the roads.

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According to the Insurance Journal,

The National Organization of Woman (NOW), which drafted the language

HB 45 (an article in act for the state of Texas), maintains that as a class women

drive about one-third fewer miles than men do and they tend to have about half

the number of accidents. In fact, NOW may possess the most comprehensive

research on the entire mileage-based issue (Roof, 2001).

Seniors who are on fixed income are really disadvantaged with this current

insurance system. Because of their limited driving, in most cases, they would save the

most in mileage-based rating. In the current system they buy 6 month to a year worth of

auto insurance policy weather they drive five miles or 50,000 miles in the policy term. In

the mileage-based insurance rating system, they will buy 10,000 insured miles for

example and they can drive them in 6 days or 6 years. They will not have to buy their

selves insured miles till they are driven.

Students who are dependent of their parents or are working part time to support

their education and themselves are over burden by the insurance cost. Due to the

expensive auto insurance, they drive uninsured in many cases or simply because they

paid their insurance and will keep on driving as long as they can afford gas. There is no

incentive for them to drive little in the conventional insurance rating system. If they can

buy the miles instead, they will have the incentive to drive less and save their mileage to

save the money.

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Reduction in Road Crashes

One of the major dangers involved in driving is road crashes. It is a proven fact

that the more a person drives, the more he or she is exposed to road crashes. The

conventional insurance system has no or very little incentive to drive less. This ultimately

leads to driving more and exposing people to more crashes and injuries. If there are more

claims that insurance companies have to pay out, the higher they will have to charge the

insured drivers. Instead, the pay per mile insurance rating system offers the incentive for

drivers to drive less and save on insurance cost. Driving less will result in less road crash

injuries reducing the claims payouts to decrease the cost to buy insurance. It will also

create opportunity for young drivers to drive insured vehicles without paying a high

premium and at the same time drive less to save the insurance mileage. The less the

young drivers drive the more peace of mind it will offer their parents.

“Collisions for young people aged 16 to 24 rises by 41 percent. The total

number of fatalities rises by 50 and personal injuries by 3,900, for these

younger drivers” (Insurance Bureau). Berkeley professor A. Edlin calculates

that “driving would be cut back by 9%, with an insurance savings of $8 billion

a year” (Edlin, Forbes, 2003).

High miles driven per year tend to raise the risk of crashes per year, even if

everything else is equal. A perfect driver also faces risk of a crash from causes beyond

their control, such as an animal running into them on the road, a mechanical failure or

sudden health crises on the roads can all be reduced by reducing the driving mileages.

Now try to imagine high-risk drivers who tend to have much more odds of having higher

numbers of crashes.
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Provides Choices

It is human nature to want choices. There are choices available in the types of

vehicles, such as coup sedans, station wagons, trucks, utility vehicles, mini vans, full size

vans etc. Then there are many different choices of manufacturers with the different sizes

of engines. Choices are also available in Vehicle colors. It is obvious that the consumer

today demand different options and choices. Why not offer choices in insuring their

vehicles. Pay per mile insurance rating will do just that. While the conventional (time

based) insurance rating system remains in effect and available to the consumer, there

should also be pay per mile rating being offered.

Market research and requests to participate in the pilot programs which

offer PAYD have indicated strong consumer interest in PAYD policies. A UK

pilot study by Norwich Union wanted 5,000 subjects to test their pilot program

and receive more than 6,000 requests for participation before officially

announcing their project. According to a Norwich Union survey, nine in ten say

they would prefer their motor insurance to reflect the usage of their car and the

type of journeys they make—with the majority favoring pay-as- you-go systems

similar to those offered by gas and electricity suppliers (IBM, 2004).

Customers may want to insure and maintain a second vehicle for pleasure use or

to just simply have it for back up. In the current insurance system, those cars are treated

like the primary vehicle and the cost to insure it doesn’t change either. Due to the

insurance cost many customers cannot afford to maintain a second vehicle. Pay per mile

insurance rating system will offer the option to insure the extra vehicle.
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“Proponents of the plan say older drivers, women, lower income drivers,

households with more cars than drivers and commuters will all benefit from the new auto

insurance policy”(Mile-Based Car Insurance,2003).

Improved rating accuracy

No one likes to pay more than they really should, in other words, who would like

to get less than what they pay for? In the State of Michigan, our auto insurance rating

system is just that, because we pay for unlimited driving for a limited time, we actually

pay for unlimited risk and drive much less in most cases. On the other hand a driver who

drives a great deal pays less than he or she should. Consumers with less driving mileage

are paying for the risk of drivers with high mileage. Portland resident, Colleen Waters, is

quoted by Jacklet, B. in The Portland Tribune saying, “If I do not want to pay for gas, I

don’t have to. If I can’t afford to get my car fixed for a while, I don’t have to. But I still

have to pay my insurance every month, whether I am driving or not. I find that annoying”

(Jacklet, 2003).

“Like factors such as age and driving record—has long been correlated with

accident risk. The more you drive, the higher the chance of a crash” (Murray, 2003). But

unlike a driver’s age and record, how far you drive is not much of a factor in determining

your premium. Some companies do offer low mileage discounts, but they don’t come

close to capturing the actual difference in accident risk between high and low mileage

drivers. Todd Litman, director of the Victoria Transport Policy Institute in British

Columbia, has done extensive research on the relationship between annual mileage and

insurance claims. “His studies suggest that if other risk factors—such as age of driver,
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time of day, and type of driving—are constant, then accident risk tends to increase in a

roughly linear relationship with mileage” ( Victoria Transport Policy, 2004 ). Translation:

If you drive twice as much, you’re about twice as likely to have an accident.

Reduction in Energy Consumption

Pay per mile insurance will decrease our country’s dependency on foreign oil.

Just as it offers an incentive to drive fewer miles and save on the cost of insurance, it will

also cause people to buy and burn less fuel. It is a simple logic, the less they drive the less

they will burn gas. Because our country will have to import less oil from other countries,

the less we will have to depend on them.

Improvement of Environment Quality

One of the most important and critical areas that needs improvement is the

quality of our environment, which could benefit by the pay per mile insurance rating

system. The qualities of the environment we breathe and live in, deserves the

improvement. If we only try to pay little extra attention, we will come to the conclusion

that the use of automobile plays a major role in deteriorating the quality of the

environment. It will surprisingly be a positive step toward the efforts that are badly

needed to make it better. Simply if vehicles driven by oil are used less it will contribute

less in worsening the quality of our air and space. Our government and private agencies

invest billions of dollars every year to improve the quality of the air that we breathe. This

would be a step to support their efforts.

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As A. Edlin calculates, pay per mile insurance rating will decrease 9

percent of driven miles. It means it will cut down 9 percent of oil consumption. At the

same time, it will improve 9 percent of our environment with out investing anything

extra. (cited in Murray, 2003).

K. Funderberger provides some interesting figures in his report.

PAYD policies simply and logically reward low-mileage drivers

by charging them less money in return for less auto use, which results in

tangible environmental benefits. The typical driver travels 14,000 miles

annually, but gas consumption varies widely. If your car is averaging 20

miles per gallon, then you are using about 700 gallons per year.

Combustion from car operation converts this into approximately 14,000

pounds, or 7 tons, of CO2. Automobiles account for more than 25% of

greenhouse gas emissions in the United States. Research expects

widespread adoption of PAYD policies to reduce driving by 10-20%,

resulting in significant decreases in greenhouse gas emissions and

resulting global climate change and air pollution (Funderberger, 2003).

Decrease in Road Congestions

Traffic congestions are one of the most stressing situations that drivers in

Michigan face almost everyday. These traffic congestions cost dollars, time, increase in

pollution, and most of all adds stress.

Washington State of Transportation market survey research indicates that

offering vehicle insurance discounts based on reduced driving mileage is one of

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the most attractive incentives to encourage commuters to shift to ridesharing and

transit. As a result, King County Metro, The largest rideshare and transit agency

in the Puget Sound region, is currently seeking to partner with an insurance

company to offer PAY insurance to its 150,000 Transit Pass holders (Bonner,

2003).

“Residents [of Detroit] Spend 57 hours in jams, but congestion is up even

more across the U.S.” It also says “Too many cars on too few roads caused Metro

Detroit drivers to waste 57 hours in rush-hours a year earlier”. In another spot in

that article T. Greenwood writes, “When it comes to congestion, Detroit

traditionally lands in the Top 10 (most congested) city list, Said D. Wschrank, co-

author of the study”(Greenwood, 2005)

The total cost of congestion in the form of delay and increased fuel

consumption in the United States exceeded $49 billion in 1992 and$31 billion in

1987. This study valued time at $8.50/hr. in 1987 and $10.50/hr. In 1992, which

would appear a considerable undercounting to those who would far prefer to be at

work than stuck in a traffic jam. It projects this figure to $60 billion in 1995

(Schrank, Turner, and Lomax, 1995). While Delucchi (1997) estimates

“congestion costs at $22.5 to 99.3 billion.

Reducing Parking Problems

In urban areas or around downtowns, where most business offices are located, are many

parking problems due to paying parking lots. Most employers end up buying monthly

passes to pay for their employees’ parking. If commuters start to carpool with each other,
 Pay Per Mile Insurance 19

it will decrease parking problems as well. City governments lose enormous amounts of

money to manage illegal parking and lack of collection for fines, that it cost them even

more than initially thought of.

One solution recommended by Shoup (1997) is,

To offer commuters cash, transit passes or another alternative to free

parking with comparable value. Like other measures to increase parking prices,

the effectiveness of cashing-out varies with the road network and with the

distribution of trips. Parking fees are seen to be more effective in the San

Francisco Bay area than in Los Angeles where much of the traffic passes through,

and (through latent demand effects) could weaken the potential congestion relief

from a reduction in driving by commuters.

Saves $s

In conventional time based insurance system many of the consumers are paying

liability insurance premium on a vehicle while it is being parked. What risk is being

covered in that case? Thousands of senior citizens, non-working mothers and medically

ill folks are being ripped off of their hard earned money. It is a fact that every driver

drives a different number of miles due to change in their circumstances and needs.

However they pay the cost of insurance that the insurance company assigns to a group of

drivers. No matter how much or how little you drive your car; you pay the average

according to the mileage driven by all the drivers in that group or pool.

Pay per mile auto insurance rating system will still rate the cost of insuring a vehicle in a

group you fit accordingly, however, you will pay only the mile cost that you drive. Those
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drivers who drive less due to whatever circumstances, they will not have to pay for auto

insurance any more than they have utilized. Pay per mile rating system saves those hard

earned dollars for less driving drivers. It will save money on the environment cleaning

cost because of less fuel burning due to the incentive for driving less.

“In Texas an average drive in a group drives 10,000 mile per year and pays a

$400.00 dollars a year for basic coverage required by law. At that rate it cost 4 cents per

mile to insure your vehicle to drive (Cents-per-Mile, 2002)”. Now in pay per mile

insurance you will have the control over the usage of the mile. For example, one could

buy insurance for 5000-miles at minimum to start with and then add additional miles at

the increment of 1000 miles at a time. You will pay again only when you are at the last

1000-mile to renew your miles and adjust the number of miles for your needs. One could

take one week to drive all their miles or 5 years and it would not cost them any extra, as

long as they do not drive uninsured or insurance rates do not go up.

As in every walk of life, there are two opposite views for everything.

While most people like the concept of PAY PER MILE INSURANCE RATING

SYSTEM, there are some concerns people have regarding this fairly new concept. Below

pages will discuss many of those concerns step by step.

Research Cost

Most of the insurers have a major concern with the research cost. They are

concerned with data collection and time involved in testing the concept. Incomplete data

and premature concept could be a disaster to the financial well being of the insurance

companies or consumer. While it is a valid concern, it is not a problem at all. If all

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insurers collect most of the data to rate the risk, they can start collecting the data sample

to use in future. The most important question they will have to collect will be the type of

use and the total mileage driven in a policy term.

Training Cost

Insurers are concerned with the training cost of the employee and the other staff

involved in pay per mile rating related transactions. Their stand is that it can be costly, so

they would have to pass that cost on to the consumer.

System Set up Cost

Operating system setup is another area insurance companies will have to invest in

simply to be able to start processing this innovative rating system. They will not only

have to have an operating system created, it will also have to be tested. All of these

activities have a price tag. There also is Actuarial set up which can take a long time to

have enough and accurate data to set up. Actuarial research is another cost bearing

activity required.

Difficulties in Mileage Records

One of the major concern insurers have, is not being able to measure the mileage

driven. They will be much vulnerable to the fraudulent mileage reading. How could the

insurer be able to keep track of the mileage driven? It causes them to not be able to

collect premiums accurately, which means loosing on the premium dollars.

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Mixed Public Support

Most customers who oppose the Pay per Mile Insurance system do so simply

because they do not understand the concept. They are unfamiliar of the benefits that come

with it. There is not enough media coverage for this new concept for them to be aware of

the advantages. They are careful of unfamiliar rating systems and are not willing to try

this new concept without learning the pros and cons.

Opposition from the high mile drivers

One of the stronger opposition comes from the drivers who drive a lot. Naturally,

they are concerned with the high prices that would reflect these high miles they drive.

They could end up paying more to drive like they pay at the pump. In the current

conventional insurance rating system all they do is pay for fuel and they drive as much

they can or want to drive, without paying any extra cost for insuring those vehicles.

T. Litman at Victoria Transport Policy Institute for The Institute for Public

Policy Research writes in his report titled “Implementing Pay-As-You-Drive

Vehicle Insurance”, “Higher-mileage motorist tend to oppose mandatory PAYD

because it would increase their costs. Most consumers are unfamiliar with its full

benefits, and many are skeptical of change” (Victoria Transport Policy Institute).

Insurers are concern for their profits

Insurers are concerned for their profit. To them, consistent projections are

important to the forecast. Their budgets depend on those carefully crafted projections.
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Fewer premium dollars translates to less profit. Less profit can cause down sizing and

employees lay offs.

The liability risk arises when the vehicle is being driven. If the vehicle does not

run on the road and is instead just parked, it can not be a liability risk to a driver or

insurer. However in the time based insurance rating system if the vehicle is parked it still

pays for the liability risk coverage. That coverage is a pure profit to the insurance

company. If they shift the conventional rating system to mile base insurance system, the

insurance companies are concerned with the loss of that profit. However, they

underestimate the savings from the decrease of claims and pay outs in long term and

short term injuries, their treatment cost, and other benefits to be paid related to those

claims.

Why industry itself did not use this concept

One of the reasons the industry was reluctant to discuss and explore the mile base

insurance concept was because of the lack of technology to keep up with the critically

important data, such as the mileage driven. Who drives it and how many drivers are

involve in a household. Younger drivers could be a disastrous risk to cover if the insured

does not include them in the insurance risk of being insured. Today the technology is so

superior compared to in 80s. Prior to the 90s, vehicles were not equipped to collect or

keep driving data in memory other than the speed-o-meters. The speed-o-meters use to be

mechanically set up, which could be tampered with easily. Nowadays, the technology has

been improved to a electronically set up system, which makes it harder to tamper with
 Pay Per Mile Insurance 24

and keeps the data elsewhere also, such as on board computer system which is standard in

every car now.

As for the concern to the number and age of drivers, in a household it can be

managed by the public information available from the state of Michigan. In conventional

rating system, insurance companies are collecting the same information for the same

reason. It will not be any extra investment new to the insurers.

Elapses in continue coverage

In the middle of the trip if the insurance mileages run out, it could create a lapse

in the coverage. People could be driving uninsured. It can cause elapse in their coverage.

In the current system, if someone is on a trip in another state and the time of the coverage

term is running out, the customer can call their insurers or prearrange the renewal of their

policy before going to the trip. Same can be practiced in the mile base system. The phone

technology and debit cards have given solutions to those concerns already.

Cancellation and renewal Notices

In traditional time based insurance, it is very easy for an insurance company to be

able to send a renewal or a cancellation notice. They know exactly when the policy is to

be renewed and will send a renewal notice 30 days prior to renewing an insurance policy.

If the policy is not paid within the specific time stated in the policy they cancel that

policy according to the state laws. In the mile based policy, it is not as easy to predict
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when the policy miles will be running out. So the insurance companies cannot issue a

cancellation notice or the renewal notice.

One way to deal with this problem would be to set up a reminder plan, according

to the mileage track records. Insurance companies should be able to predict about when

the mileages for each customer should be running out. The insurance companies should

send reminders to check the insured’s auto mileage to determine if they need to renew the

mileage to drive any further.

In the early years, insurance companies should require the insured to report their

mileage. This would produce the data that is critically needed. Besides sending

cancellation notices is not friendly mail. Instead sending friendly reminders should not be

so threatening. It will decrease the hostile impression.

Political opposition

One may not think that political opposition would also be a factor. Believe it or

not it is. As mentioned above, pay per mile will help decrease the amount of driving

which consequently will decrease the fuel consumption. Less driving will cause less sale

of fuel and generate less fuel tax to the government. It also bothers fuel importer’s

lobbyists who pressure the government to not consider anything which could compromise

their interest.

The political opposition needs to realize the savings that could be gained

from less accidents and public services costs, road maintenance costs, and

environment improved quality. “Oregon relies on the gas tax to pay for its road

system” (Whitty, 2004).

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Implementing of PPMI

Implementation of this new concept in the state of Michigan will require

participation from each insurance company who wants to participate in this innovative

rating system. It should be implemented by each individual insurance company. At the

start, insurers should offer this Pay per mile insurance rating system as an option along

with the traditional time based insurance rating system. Private companies should

cooperate with insurers in promoting this concept and state government should offer

some incentive to insurers to participate in offering this option. After all, it is going to

offer the benefits to all classes of life.

The biggest concern is how to verify the mileage driven, but it is fairly simple to

obtain that information. All of the vehicles manufactured in 1991 or above are equipped

with an on board computer systems. This computer system is capable of keeping driving

mileage records independently from speed o meters. Besides, the speed o meters and

computerized sensors driven are so sophisticated these days that it is not very easy to

tamper with them. If one thinks that the same speed o meters are good enough for auto

leasing companies to rely on, then it should be accurate enough for the insurance

companies to rely on also. This should not cost extra.

For the older vehicles without the on board computer system, the verification of mileage

can be done by the repair facilities. If we look in the past to a few years ago in the late

80s, we will find the time when the Federal government required the state of Michigan to

implement emission system to control the pollution in the environment. This task was

performed through the repair facilities. Currently AAA Michigan (a major insurer in the

state of Michigan) and Geico Direct (another insurer) gets their physical damage
 Pay Per Mile Insurance 27

inspections for comprehensive and collision coverage through different repair facilities or

their branch offices. Same can be practiced for mileage verification. Allstate Insurance

Company, State Farms Insurance Company, and Auto Club of Michigan are the largest

insurers in Michigan. They have their own approved damaged auto repair facilities and

run repair estimates for each of the insurers. Insurance companies rely on their estimates

and audits their repair estimates on a random occasions. If measures mentioned above are

good enough for their purposes, then same can be utilized for keeping track of the

mileages. This also should not cost extra. In Massachusetts, Professor J. Ferreira Jr. is

working on a pilot program for usage-based auto insurance products. He expects the pilot

program to produce as followed:

The Pay as You Drive Pilot will be working with Value pricing

program staff, including their statisticians, to analyze data on an ongoing

basis. We expect to issue a final pilot analysis of “Before” and “after” data at

the end of the 36-month pilot and an interim report after the first year of

observation. If the results look promising, our goal will be to work with

FHWA and the Massachusetts Division of Insurance to develop an approvable

usage-based auto insurance product for the broader public (Ferreira, 2001).

The Progressive Insurance Company introduced its Autograph vehicle

insurance coverage, a form of distance-based insurance in the state of Texas in

1999. This uses Geographic Positioning System (GPS) beacons to track

vehicle location and use (motorists pay more for driving under higher risk

conditions). This program has been successful, and Progressive is planning to

expand it into other markets (Carnahan, 2000).

 Pay Per Mile Insurance 28

Many Vehicles these days are equipped with GPS. This system is capable of

collecting much more than just the mileage of each vehicle equipped with GPS system.

While it is the most accurate and reliable system, it has a big price tag attached to it.

However, the process may need state legislature to pass and enforce some laws to limit

the information that can be collected. This would provide the confidence and peace of

mind to the consumers who have concern with invasion of privacy. According to the

report by the Victoria Transport Policy Institute’s TDM Encyclopedia which was updated

on June 4, 2004 says,

There are concerns that odometer fraud could be a problem, but

odometer audits should provide data as accurate as that used in other common

commercial transactions and more accurate than self reported information

now used for insurance pricing. Most tempering can be detected during audits

and crash investigations, and fraud would void insurance coverage. Vehicle

manufacturers produce increasingly tamper-resistant odometers since leases,

warranties and used-vehicle sales all rely on odometer readings. Audits would

provide additional benefits, including accurate mileage information for used-

vehicle buyers, and more accurate information for transportation planning

(Victoria Transport Policy Institute).

In Ontario Canada, an insurance broker known as (AVIVA) has introduced a

device called (Autograph ™). This device is designed to collect the information such as

time of driving, driving speed, and the distance of driving. It is connected to the on board

computer under the dashboard of every vehicle manufactured after 1991. AVIVA is

currently collecting a refundable security deposit from their participating customers. The
 Pay Per Mile Insurance 29

Pilot program is in affect in Ontario only at this time and is not used for mile based

insurance system.

The first insurance program offered in Canada to reward

responsible drivers with lower premiums. As a broker, have you ever felt

the insurance companies lump all of your customers with every other

driver on the road, regardless of how they drive? Wouldn’t it be nice if

more responsible driving habits could be reflected in the cost of auto

insurance?

Until now, it hasn’t been possible to provide auto insurance pricing

that truly reflects how a car is driven. Autograph is about to change all that

and AVIVA group brokers will have the opportunity to share this new and

innovative approach with your customers.

Autograph will reward drivers who use their vehicles in ways that lower

the risk of collisions. These include:

Driving fewer kilometers than average.

Driving at safer times of the day when incidents are less likely to occur.

Driving at slower speed.

AVIVA believes that responsible drivers should be rewarded by

paying lower auto insurance premiums. They also believe that customers

should have the opportunity to control how much they pay” (How

Autograph Works, 2005).

SECTION III: METHODOLOGY

Independently collected data

 Pay Per Mile Insurance 30

To gather a sample of how the consumer of insurance industry will respond to this

concept, I have independently done some public interviewing, held a group discussion,

and done a survey. A result of the sample survey is attached at the end of the report for

verification.

Three key questions of personal interview among 10 other questions were as

mentioned below:

Are you happy with the rating system for auto insurance available to you in the

state of Michigan now?

The answers were asked in three variables of either yes, no, or not sure. For the

first key question in the 43 samples of interview question 35 responded “No”, 2

responded as “Yes” and 6 responded as “Not sure”. To the question of do you have

control over the insurance cost?

The answer to this question had given 3 variable of yes, no, or not sure. 40

respondents out of total 43 interviews replied “No”, 1 respondent out of 43 replied “Yes”,

and 2 replied “Not sure”. When asked the 3rd question of, would you like to have an

option available? All 43 samples of interviews had only one answer. 100% responses

were “Yes”, which means every one of the interviewed want an option. To translate in

percentage responses to the question, one of the above comes to 84.4% were not satisfied

with the rating system used to charge the risk of liability insurance in the State of

Michigan. Only 4.6% percent are happy, while 7.2% were not sure.

Responses to Question #2 in the above interview key questions were 93% who

chose to reply “No” over having control on the cost of insurance, 2.3% said they did have

a control over the cost, while 4.7 % were not sure.

 Pay Per Mile Insurance 31

When asking in question #3 whether customers want an option rating system to

purchase insurance for their automobile, 100% of the interviewees overwhelmingly

replied “Yes”.

The graph below shows the variation of each key question.

The first set of bars of the above graph in blue which shows how dissatisfied the

customers are of insurance industry. The second set of Bars or the larger bars shows how

disappointed people feel when not having control over their insurance cost. The last bar

in the above graph shows how overpowering the customers wish to have options when

they buy automobile insurance.

 Pay Per Mile Insurance 32

Survey

The survey was done to see the response of potential customers for the insurance

industry. In response to the 100 survey distributed, 70 respondents returned and

responded to the survey questions. I am attaching the graphic results of the key questions

asked in this survey. It shows very interesting results. See the graphic below covering

question 5, 9, 10, 11, and 12.

50
45
40
35
30
25 YES
20 NO
15
10
5
0
Q5 Q9 Q10 Q11 Q12

Question # 13 asks the participation of respondents in decreasing the driving

miles if they have the option to save the premium cost by driving less, would they

participate in that program and how much of driving they anticipate decreasing.. The

chart below should show the results.

 Pay Per Mile Insurance 33

Q13

2 to 5 %
6 to 10 %
11 to 15%
16 or Higher

The graph below shows the relevancy to question # 16. This question asks the

respondents their age group. Even if it does not support the age group, I intended to

introduce the people who would be most interested in this concept of insurance.

However, it shows the age group which is between the ages of 16 to 45 to be very

interested in this concept. They are in the age when most are struggling to raise families

and build their futures. They would love to take the break in the cost of insuring their

vehicles.
 Pay Per Mile Insurance 34

Q15

25
20
15 Q15
10
5
0

SECTION IV: ANALYSIS OF THE DATA

In the survey from 70 potential auto insurance customer we asked 6 key questions

to see the interest in the new insurance concept for the State of Michigan. To the question

# 5 in the survey sample asked the participants of the survey that if they will participate

in the new concept of auto insurance called pay per mile insurance.

In question number 9 we asked the participant of the survey that if they have a

control on the insurance cost, would they consider buying another vehicle. Question 10

asked that if the participant would be willing to drive less to save on the insurance cost.

In the question number 11 participants responded to the question that if they will

consolidate their errands to save on the insurance miles. Number 12 of the survey key

question we asked if the participants will share rides to reduce driving mile to save on the

cost of the auto insurance.

The first graph shows the clear willingness to participate in each key question

area. The 2nd graph in a pie shape shows that participants are willing to decrease their
 Pay Per Mile Insurance 35

driving, which support the idea of pay per mile insurance rating system that insurance

and driving amount has a co relationship.

Frequency Table and Cross Tabulation Reports were created and have been

attached as appendixes. Please see the Frequency Table appendix # 4 for responses to

each survey questions. The frequency chart shows the percentage of each type of

responses whether they are yes, no or other options. While Cross Tabulation Report

represents the answers of survey questions based on age and gender. Appendix # 5

represents the age factor and their co relationships to the choices made and appendix

number # 6 shows the gender responses and their co relationships.

SECTION V: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

Summary

The research clearly shows that auto insurance consumer overwhelmingly wish to

have more options available to them. After reading other journals, reports books and

studies done by other scholars, it is not hard to realize that the insurance industry should

pay attention to the desires of their customers. Pay per mile insurance rating system could

be a very popular system among the customers of all ages and form every walk of life.

Few of the states are already doing research on this rating system. As a matter of fact the

State of Texas is already using this plan as an option rating system to be offered to the

consumers alongside the time base insurance rating system.

 Pay Per Mile Insurance 36

Conclusion

There is a clear need of alternative rating system. The suggested Pay per mile

insurance system could meet that need. It will also be very beneficial to the other critical

area of concerns, such as road congestions, environment, accidents, fuel consumptions

and parking problems.

Corporate America claims to run businesses, finding the conveniences and

feasibility for the consumer. Just like any other industry, the insurance industry should

consider thinking on those grounds and principles. They need to offer options. One of the

options they can invest in is what is introduced in this research report. It does require

intensive research but it could be a great option. The Insurance industry should at least be

willing to consider the concept.

Recommendations

Thousands of people involved in auto related accidents are killed every year and

many more are physically injured. Considerable numbers of those physically injured are

permanently disabled. Besides the emotional cost, there is a high cost involved in

accidents, driving related injuries, property damage, congestions on the roads, emergency

services and environmental pollution etc.

Today’s automobile technology is much better and safer than in the past. There

now are air bags, seat belts, anti lock brakes and newly introduced sensors to avoid

accidents and so on. We also build better roads and enforce driving related laws.
 Pay Per Mile Insurance 37

However still annual accident related numbers of deaths are in thousands. As a state

government and society we do not do enough to improve these conditions.

The insurance is rated in such a way that we are giving a blank check to put as

many mileage one feels like putting on. We do not offer any incentive to think twice

before we sit on the driving seat of an automobile. The system being used in the State of

Michigan measures time, not the miles. One could be driving 24 hours a day and pay for

same as another driver of same rating pool who may not even drive a 1000 miles a year.

As long as they can buy fuel for the vehicle they can keep on driving. Wouldn’t it be nice

to give a financial break to those who drive less and let those who drive more and are also

bigger risks on the road pay more? We can do that with Pay per Mile insurance rating

system. How could a vehicle be a liability risk to the insurance company while it is

parked? Isn’t it unfair for those drivers whose vehicle stays parked most of the time but

are paying for the liability risk as if they are driving it?

The insurance companies should get involved in finding a reasonable way to help

the society come over these problems. One of the ways they can help their customers is

by offering an alternative insurance pricing system. Pay per Mile insurance rating system

is one of the most effective measures they can take. It does have most of all the elements

to encourage an insured driver to decrease driving. It will be much more accurate to rate

the risk of each driver. It will result in less driving, and consequently it will result in less

automobile related accidents. It will decrease in the number of accidents, and will

improve the profit margin for the insurers. It will likely to improve the profit due to fewer

claims. Insurance companies should offer this new concept along side their time based

insurance as an option plan to begin with.

 Pay Per Mile Insurance 38

References

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Retrieved: February 24, 2005. Website:

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www.detnews.com/2005/commuting/0505/AOI-176896.htm
 Pay Per Mile Insurance 39

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 Pay Per Mile Insurance 40

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 Pay Per Mile Insurance 41

Appendix

Appendix # 1. Survey

Appendix # 2. Survey Coding for Cross Tabulation Report

Appendix # 3. Frequency Table

Appendix # 4. Cross Tabulation Report Question 15

Appendix # 5. Cross Tabulation Report Question 16