Escaping the "all you can eat" motor insurance buffet

The Freakonomics guys have just given Pay As You Drive (or PAYD) insurance some much-needed publicity.

Also called 'distance-based insurance', this turns motor insurance payments, which are usually a fixed cost, into a variable cost. This makes it possible to save money by driving less.

They write in their April 20 column in the New York Times Magazine.

Imagine that Arthur and Zelda live in the same city and occupy the same insurance risk pool but that Arthur drives 30,000 miles a year while Zelda drives just 3,000. Under the current system, Zelda probably pays the same amount for insurance as Arthur.

While some insurance companies do offer a small discount for driving less — usually based on self-reporting, which has an obvious shortcoming — U.S. auto insurance is generally an all-you-can-eat affair. Which means that the 27,000 more miles than Zelda that Arthur drives don’t cost him a penny, even as each mile produces externalities for everyone. It also means that low-mileage drivers like Zelda subsidize high-mileage drivers like Arthur.

They report that next month the large US insurer, Progressive, will actually start a comprehensive PAYD plan called MyRate.

The column offers some perspective on the slow progress of this seemingly obvious winner of an idea:

If PAYD is such a great idea, why has it taken so long? There are at least three reasons: the tracking technology has only recently become affordable; insurers were anxious about drivers’ privacy concerns; and there was a substantial risk for whichever company was first to offer PAYD on a large scale.

They also provide background and links on the issue at their blog.

For more background on PAYD insurance see also Todd Litman's efforts to promote the idea.

Many tonnes of greenhouse gases depend on how this plays out!