Pay-as-you-drive motor insurance could cut vehicle mileage

Renewed calls for pay-as-you-drive motor insurance have come from the UK policy think-tank, ippr, and the Victoria Transport Policy Institute in Canada. In a paper presented to the ippr, Todd Litman, Director of the Canadian Institute, called for insurance companies to set premiums based on mileage rather than the current flat-rate fee.

Distance-based insurance policies are already on offer from the Progressive Insurance Company in Texas and the Norwich Union in the UK. Norwich Union’s scheme relies on satellite tracking and only works on new cars with tracking devices. Litman proposes an easier method of auditing car odometers. Car owners would give an estimated annual mileage when buying a premium and would be audited annually, receiving a rebate for fewer miles driven or a surcharge for exceeding the estimate. The odometer could be audited as part of a service or MOT.

“A mileage based, instead of flat rate, insurance premium could reduce insurance costs for low-income motorists who drive fewer miles and provide an incentive for all motorists to drive less,” says ippr Associate Director Tony Grayling. “This change would tackle social exclusion and help the Government to cut congestion and pollution.”

Market surveys show mixed public opinion towards distance-based insurance. While many welcome the savings for low-mileage drivers, some are concerned that rural motorists will be penalised. Todd Litman recommends that premiums be based on average annual mileage for different types of drivers, so that rural drivers would only be charged for exceeding the average distance for a rural motorist.

“It makes sense in insurance terms to relate the cost of driving to the risk, which increases with distance travelled,” says Stephen Glaister, Professor of Transport at Imperial College London. “From a transport policy perspective, pay-as-you-drive is consistent with charging road users with the direct cost of using the road. It’s a step in the right direction, but the difficulty will lie in enforcing the scheme.”

But is it likely to make people use their cars less? “There’s good evidence to show that people drive less when the cost of fuel goes up, so if people regard distance as a factor in the cost of their insurance, they should adjust their driving accordingly,” says Prof Glaister. Todd Litman equates the pay-as-you-go scheme with a 75% increase in fuel price and predicts that the economic incentive will generate a 10% reduction in vehicle mileage.

With recent reports that road traffic is on the increase (see related story), Deputy Prime Minister John Prescott could turn to insurance companies to meet his pledge to cut road usage.

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