Car insurance prices could be based on user’s mileage

Buying car insurance is not something that most people enjoy doing; consumers hate it. The pricing is based on a number of factors that aren’t understood by the public or explained to them. The prices tend to be based on what kind of car they drive and where they live, rather than how they drive. As a result, people who don’t drive much but live in urban areas tend to spend just as much money on their coverage as people who drive 1000 miles per week. There must be a better way.

Perhaps there is a better way. Some companies in Europe and elsewhere are experimenting with a completely new pricing system for car insurance, based upon miles driven by the policyholder. It makes a lot of sense; you pay for the insurance that you use, rather than the insurance that the issuing company says that you need. The more you drive, the more you pay. These pricing systems still take into consideration such factors as the type of car, the history of the driver and where the driver lives, but the number of miles driven becomes a much bigger factor in how much the consumer pays.

There are several different systems in use to determine the mileage driven. In the simplest one, the insurance company simply makes an annual or semi-annual check of the odometer on the policyholder’s vehicle.  In some more complicated systems, GPS-enabled devices or electronic mileage monitors are installed in the car.

The system seems to have worked well in places where it is being used. Here in the United States, the system seems to have largely been ignored so far. There are some municipalities that are negotiating with their insurance companies to test such a system, and Texas passed a law in 2001 making such a pricing model legal. So far, no insurance companies have adopted, or even tested, this pricing system.

The reason no companies are eager to change to, or even offer, a pay-as-you-go insurance policy is a simple one - it would cost them money. Studies show that the average savings for consumers would be about 10% per year if companies adopted a system that allowed consumers to purchase only as much coverage as they need. Instead, insurance companies are doing very well by selling consumers more product than they actually use.

This may change in time, particularly if consumers begin to demand changes in the pricing system. At the moment, about half of the states have laws that would permit the implementation of a pay-per-mile coverage system. Other states would require legislative changes in order to permit companies to sell policies on a per-mile basis.

You wouldn’t agree to pay for gasoline on an annual basis without regard to how much you drive, would you? Then why should you have to pay for auto coverage using a system that doesn’t take into account how much you drive?

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