Car Insurance by the Mile Debuts in California

By: - September 7, 2011 12:00 am

California drivers who keep their cars in the garage will now be able to get discounts on auto insurance.

The state’s Department of Insurance gave companies the green light last year to charge customers based on the number of miles driven, with the goal of cutting back traffic and saving drivers money. Insurance carriers like the change, because it lets them get more information on driving habits and charge appropriately.

Already, more than 80 percent of policyholders with the Auto Club of Southern California are using the new plans, which were first offered in February, says spokesman Jeffrey Spring. The auto club expects that number to climb to more than 90 percent.

State Farm, the nation’s largest auto insurer, would not reveal how many of its California customers have opted for the mileage-based plans. But last year, it predicted a quarter of them would choose the new option, saving the drivers million. Bob Devereux, a spokesman for State Farm in California, says the new pricing scheme received a “very positive response.”

“It puts the customer in the driver’s seat,” he says. “(Customers) like the fact that they have more control over their future premiums.”

New insurance model

The new California plans are part of a growing trend among insurers to gather more data on individual customers’ driving habits. The mileage discounts are an incentive for the customers to share it.

State Farm, for example, is using different variations of its Drive Safe and Save program in five states — California, Colorado, Illinois, Ohio and Texas. Most of those programs depend on data from OnStar devices. California is the only state where drivers can participate by simply reporting the mileage they have driven. State Farm contracts with other companies that track vehicle histories to make sure that the odometer readings that customers report are in line with mileage recorded by auto mechanics and dealers.

In State Farm’s home base of Illinois, though, drivers can also install devices that measure the G-force in a car. They report not just mileage, but time of day, speed, acceleration, braking and the force during turns. Allstate Insurance offers a similar program in Illinois, Ohio and Arizona.

State Farm plans to roll out the program in more states, once it gets regulatory approval, says spokesman Kip Diggs. “For us,” he says, “it’s where insurance pricing is headed.”

It is a relatively new model, though. State Farm first got approval to try it out in Ohio two years ago. It can take time to win over regulators. “It’s different from the way that insurance has traditionally been sold and the way that it has been priced,” Diggs says. “When you do something different, you have to expect that you’ll have to explain what you’re doing.”

New prices

To encourage drivers to sign up for the mileage-tracking programs, insurance companies are offering discounts to those who enroll. The Auto Club of Southern California, for example, expected customers under the new system to save per vehicle compared to those who stayed in the old plan.

The initial discount for State Farm customers in California is 5 percent. After that, a customer’s bill will reflect the mileage that he or she reports. So if a customer cuts back on his driving for six months, he will not see the reduction until he renews his policy for the six months after that.

The typical California driver puts 12,000 miles on her car every year; the State Farm policy targets those who drive 19,000 miles or fewer. Even an annual reduction of 500 miles could save customers 1 or 2 percent on their bills, says Devereux, the State Farm spokesman from California. But it is also possible, he says, that some customers will see their bills go up.

Devereux’s family recently signed up for the new type of coverage, he says. He suspects he may save a little money on his own car, now that he has cut down his commute. But his wife does not commute to work and rarely uses her car, so it is likely the family will save more money on insurance for the second car.

Driving less

One big unanswered question about the new pricing scheme is whether it actually makes customers drive fewer miles.

From an insurers’ standpoint, customers who get behind the wheel less often are less risky. “The fewer miles you drive, from an actuarial standpoint, the less the risk of that individual being in an accident or having a claim of some sort,” Devereux says.

In California, fewer drivers could also lead to fewer traffic jams and less air pollution. But insurers say it is still too early to tell what, if any, impact the mileage-based insurance rates will have on their customers’ driving decisions. 

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