EIA Pay-As-You-Drive (PAYD) Study

Studying ways to change driving habits

IssuesOutcomesServices

Issues

Mileage-based insurance (also known as Pay-As-You-Drive, or PAYD) means that vehicle insurance premiums are partially based on the number of miles a vehicle is driven during a given period. PAYD insurance is designed to encourage drivers to reduce the amount of miles they drive, thereby saving money, and reducing fossil fuel consumption, carbon emissions, and traffic congestion. While prior research has shown that risk increases with mileage, the precise nature of the relationship at the individual driver level was not well understood, slowing the adoption of this method of encouraging changes in driving habits.

Outcomes

A study to understand the impact of the PAYD method of pricing auto insurance was commissioned by the Conservation Law Foundation and the CLF Ventures affiliate, the Environmental Insurance Agency (EIA). The study was prepared by MIT Professor Joseph Ferreira, Jr. and Eric Minikel for the Conservation Law Foundation, with support from the Surdna Foundation, the Transportation Alliance and the Environmental Insurance Agency, and in collaboration with the Massachusetts Institute of Technology. The report is the first of its kind linking real miles driven with actual claims filed, analyzing $502 million of claims on over 3 million cars for a total of 34 billion miles from the Commonwealth of Massachusetts.  More information about the study can be found at http://www.clf.org/work/HCEJ/PAYD.

The study found a significant correlation between miles driven and risk and confirms that mileage is an accurate predictor of risk, laying the groundwork for adoption of alternative auto insurance pricing models based on mileage. Overall, the study confirms the actuarial soundness of Pay-As-You-Drive (PAYD) auto insurance pricing and indicates that the PAYD approach would significantly reduce miles driven, auto accident losses, insurance costs and greenhouse gas emissions, creating a win-win-win situation for insurers, consumers and the environment. Specifically, the study found that:

• PAYD provides individual policyholders more control over their insurance costs and more accurate premiums for the type of driving they do. PAYD pricing reduces inequities by eliminating the subsidies low-mileage drivers currently pay for high-mileage drivers in the traditional pricing system.
• The study estimates that switching all Massachusetts drivers to pure per-mile auto insurance pricing would reduce mileage, accident costs, and fuel consumption by 9.5% and cut 2 million tons of CO2 emissions. Depending on a number of variables, including the amount paid per mile, the types of coverage provided and the availability of alternative modes of transportation to drivers, the reductions could range between 3 and 14%.

Services Utilized

Analysis
CLF Ventures identified the need to conduct a study of this kind to provide solid analytical data to an environmentally sound idea, thereby encouraging the adoption of policies that reduce traffic congestion and protect the environment. CLF Ventures connections in the scientific community identified the partners for conducting the study. EIA and CLF Ventures personnel identified the funding sources required for the analytical team to conduct the work based on our partnerships in the foundation community.

Communication
CLF Ventures utilized our communications skills and connections in the regulatory community to publicize the importance of this study and encourage its review with state agencies. The study is being used by the State of Massachusetts to consider further exploration of the PAYD model.