Auto insurance and pay-as-you-go

Privacy has been one of the hot trending issues over the last year. It really took off when Facebook began playing with its terms and conditions, but now it’s all tied up with the extent to which anyone can collect information about your use of the internet. Today, with the technology falling in price and improving in quality, insurance  companies are deciding whether to make pay-as-you-go one of the standard policies on offer. To understand what’s involved, we need a simple explanation of how it works. To calculate your premium rate, insurers currently weigh factors including your age, gender, where you live, whether you are a student or employed, whether you have picked up tickets or make claims, and whether you appear to be a responsible person from your GPA, credit card score and other records. All these factors are reasonably reliable because they are facts you cannot influence directly. That’s why insurers have always been reluctant to offer discounts for low mileage. It’s possible drivers may lie or change the odometer. The new technology transmits information to your insurer giving your location, the time of day, and the distance traveled. Some insurers are also offering technology to monitor the way you drive, but this is a different issue.

In our modern society, the number of vehicle thefts has been falling but, in some neighborhoods, it remains a common problem. If all vehicles had a GPS transmitter, this would make the recovery of stolen vehicles easier. So the technology to track a vehicle’s movements is almost certainly here to stay. This is also vital information to your insurer about whether you are at risk of an accident. If all your driving is around a suburb at off-peak times during the day, the risk of an accident is small. But if you commute long distances down an interstate every day, the risk of a collision is high. The more miles a year you drive in heavy traffic, the more likely a claim. Hence, if you are a senior, a homemaker or drive fewer miles than average, a pay-as-you-go policy will be good for you. Indeed, those who prove their driving records can earn up to 40% discounts if they sacrifice their privacy.

Nevertheless, pay-as-you-go is not the most popular policy with the insurance industry, particularly if the technology can also monitor how well the vehicle is being driven. Let’s take this step-by-step. The idea is that the premium rate should be based on actual evidence of how safely we drive. If the times, places and distances prove us less likely to claim, we earn discounts. But suppose it turns out that, say, 50% of all drivers have low mileage and drive safely and they all claim their discounts. That means the remaining 50% are all the drivers most likely to have an accident and their auto insurance rates should rise. Remember, insurance is all about spreading the cost of the risk among everyone in the group. If the cost of all the claims remains the same but half the drivers now receive a discount, the remaining drivers must all pay more. So cheap auto insurance for the low mileage crowd and expensive insurance for everyone else.