Print this page

California Prop 103-compatible PAYD

California Pay-As-You-Drive (PAYD) Auto Insurance
April 2013 Status


With PAYD auto insurance, drivers who drive less (and emit less GHG) save money. If humans lived in a rational world that was serious about reducing GHG, PAYD would be one of the first policies to be adopted. PAYD can be characterized as a "no-brainer" climate protection policy. Cost per GHG ton reduced is essentially $0 - demand reduction policies tend to be extremely cost-effective.

California's auto insurance market is constrained by CA Proposition 103. Other states can implement a larger range of insurance policies, whereas CA pursues public policy consumer fairness objectives such as limiting redlining.

For other states, PAYD can cut personal auto driving GHG and VMT (vehicle miles traveled) by 8%. Under Proposition 103, CA PAYD can cut GHG and VMT by 3.2%, providing the equivalent motivation to drive less as a $0.70/gallon gas tax increase. State Farm's CA "Drive Safe and Save" PAYD policy achieves this 3.2% GHG reduction. The State Farm policy can be characterized as "modest flavor" PAYD. AAA (Auto Club of SoCal) has a "weak flavor" CA PAYD-like policy that produces 0% GHG reduction. 3.2% CA personal auto driving reduction calculates to 3.7 billion less VMT per year and 1.8 million CO2 tons reduced.

While CA PAYD cannot reduce GHG as much as other states, CA is one of the more aggressive states in adopting climate regulation, providing an opportunity to implement PAYD ahead of other states. CA Insurance Commissioner Jones is pro-climate and has "sought ideas on how to work with the industry to help protect the environment, diminish climate change, and properly evaluate environmental risks." Jones understands the benefits of PAYD and understands the difference between State Farm (3.2%) and AAA (0%) flavors. It is possible that Jones will advance voluntary measures to increase the adoption of modest flavor PAYD.

Implementation Details for Modest-Flavor, Proposition-103-compatible CA PAYD:

1. A high mandatory miles rating factor level of 31%, based on a strong actuarial case that a) miles are more correlated to losses than current policies. For example: 32% driver safety record, 31% number of miles driven, with the final 37% distributed between "years driving experience" and the optional factors. 31% provides equivalent driving reduction motivation of a $0.70 per gallon gas tax increase.

Weak-flavor PAYD, such as offered by the Auto Club, should not be allowed. If a driver reduces annual driving mileage from 12,000 miles to 500 miles, they only save a few dollars.

Modest-flavor PAYD, such as State Farm's CA PAYD, saves drivers $400 when they reduce annual mileage from 12,000 to 500. Spreadsheet analysis ( shows that State Farm provides driving reduction motivation that would produce between 3.2% and 3.9% CA statewide VMT reduction (equivalent of $0.70 per gallon gas tax increase).

2. Billing a minimum of 3 times per year. This would be based on a "miles correlation" finding: loss is highly correlated to miles driven, and hence, miles driven must be made more visible to drivers in order to increase safety. While some insurers believe frequent billing is burdensome, other industries bill efficiently 12 times per year. US DOT Connected Vehicle, GM OnStar, and Microsoft/Ford Sync are enabling technologies. Automakers might even testify in favor of the policy.

3. Mandate "verified miles," eliminating estimated miles, based also on the "miles correlation" finding.

4. Require a maximum mileage band of 100 miles (necessary given frequent billing), based also on the "miles correlation" finding.

If a deliberative public policy process were to be undertaken by CA Department of Insurance (DOI), expect favorable testimony from outside of the usual insurance sphere: the Governor, US DOT / FHWA, Brookings Institution Hamilton Project, CARB, business lobbies (Silicon Valley Leadership Group and Bay Area Council) and the four large MPOs. CARB and MPOs will be very extremely grateful for DOI leadership in large GHG reduction, given difficulties in meeting 2020 and 2035 targets. Analysis should produce a finding of a "net economic gain" from the policy, as opposed to the policy being a "job killer."

As far as creating a market tipping point to bring about 100% strong-flavor PAYD and 0% traditional auto insurance, some experts believe that PAYD cost savings are such that rational consumers behavior will drive this process naturally. DOI should monitor the market over time, and if the market moves too slowly, sterner measures should be considered.

Economic Benefits of PAYD - References

  • Brooking Institution's The Hamilton Project, "Pay-As-You-Drive Auto Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity,"
  • "Safe Travels: Evaluating Mobility Management Traffic Safety Impacts" ( ). This report investigates the safety impacts of mobility management strategies that change how and the amount people travel. It evaluates the safety impacts of various types of strategies including improvements to alternative modes, pricing reforms and smart growth land use policies. Evidence summarized in this report indicates that per capita traffic crash rates tend to increase with per capita vehicle travel, and mobility management strategies can provide significant safety benefits. This analysis indicates that mobility management is a cost effective traffic safety strategy, and increased safety is one of the largest benefits of mobility management.