CAS 2004 Spring Meeting Pay-As-You-Drive

How has mileage been used? Vehicle use –Pleasure –Farm –Commute –Business –Artisan Commute distance Annual mileage discount

Specific mileage discounts Many companies discount ~10% on major coverages for <7,500 or 8,500 annual miles Some provide a second break point for a lesser discount at 12,500 miles annually. Several companies build use, commute distance and annual mileage into driver class

Regulatory Encouragement California – Prop 103 requires use of mileage in rating as a major determinant –Results in surcharges for higher annual mileage Specific regulations in some states provide for pay-as-you-drive (TX, OR) Many Providences in Canada have encouraged more mileage rating experimentation

Considerations When using vehicle use and mileage –Correlation in the rate order may exist Likely to be correlation between mileage and several other variables Age Territory (rural Vs urban) Multi-car

NHTSA data Wide dispersion creates opportunity for segmentation

Issues with mileage Vehicle use is only a proxy for mileage Self reported and unverified Verified mileage a hassle to collect Automated collection expensive Actual mileage not linked to loss data Type of mileage may be as important as magnitude

What else could be done? Usage based insurance –Change rates for subsequent terms based on actual mileage in prior term –Bill rates in current term based on actual current mileage – “Pay-as-you-drive”

New problems, new opportunities! Tracking mileage in real time Reporting mileage to insurer (cellular) Billing adjustments (utility) Term length (miles instead of months?)

Commute Mileage Verifiable Progressive – MN commute mileage verified by calculating distance from center of home and work zip codes Several vendors have software to calculate mileage between specific addresses Publicly available software on the Internet can be licensed for commercial use

Automated approaches Progressive – 1997 Autograph study in Texas Aftermarket GPS and cellular technology Collected time and place Computed mileage by time of day and location Billed for usage monthly Erie County NY – 1998 GPS & cell phone for emergency dispatch Norwich Union – 2002 Licensed Autograph patents and markets pay-as-you-drive in UK

Automated approaches GMAC – 2004 OnStar discount uses factory installed product to track mileage and provides range of discounts in subsequent term for imputed annual mileage up to 15,000. Addresses primary issue of cost –Factory installed device –Exists for purpose besides insurance