California insurer tweaks pay-as-you-drive model

California drivers soon will be able to take advantage of what's being touted as a better version of the "pay as you go" concept, which ties the number of miles driven to the cost of auto insurance.

The first few insurers offering this product have used "bands" -- between 5,000 and 7,000 miles, for example -- to set rates. Drive within a band and pay less than motorists who fall into a higher band. Drive below the band and set yourself up for additional discounts.

Now, with a plan designed to appeal to both penny pinchers and tree huggers, California-based CSE Insurance Group has taken it to the next level by getting rid of the bands and beefing up the discounts.

california pay as you drive insurance

New and improved

CSE's new SAVE program (Savings Advantage by VEhicle) offers two key advantages, says Matt Hull, vice president of CSE.

The first advantage is the band system. If you know you're going over 5,000 miles, for example, you have no incentive to cut back as long as you stay in your band. CSE has made its program mile-by-mile. Reducing your car travel by even a few miles means more money in your pocket.

The second advantage is the reimbursement schedule. Instead of prospectively giving you a discount for future years as your annual renewal date comes up, CSE plans to give its customers a check right away if they drive less than anticipated. Those who watch every penny should love the plan -- walking rather that driving to your neighborhood store saves money. Meanwhile, eco-friendly types love the idea of literally paying people not to drive.

"It can reduce emission and congestions. You'll be using your car less," Hull says.

The exact cost per mile is a little hard to calculate, Hull says, because CSE will be basing the policies on a curve. As you continue to reduce your mileage, the costs will fall with increasing speed, rather than in a linear fashion. Think of that first big roller coaster drop: The farther you fall, the faster you move.

Justin Horner, a transportation analyst with the Natural Resources Defense Council, is pleased with CSE's program, the fourth use-based auto insurance offering in California. The others are from the Automobile Club of Southern California, State Farm and Sequoia Insurance Co.

"A growing number of companies are moving in this direction. The concept makes sense to most people -- although most are surprised that [in traditional policies] there is little connection between rates and how much they drive," Horner says.

Horner was especially pleased at the elimination of bands. He compared the new product to riding in a taxi, with a rider getting out half a block from a destination, rather than waiting for a light to change while the meter continues to run.

Proceed with caution

Doug Heller, executive director of the California-based advocacy group Consumer Watchdog, is cautiously optimistic, noting that "CSE has created a better plan than anyone else has. We've always liked the idea of saving money by changing habits. The CSE plan does that as precisely as any insurer can do."

But Heller didn't formally endorse the SAVE program and warned consumers that they should check any pay-as-you-go policy before automatically assuming it's the best deal.

For example, consider "XYZ Insurance Co.," which offers a standard policy that's more expensive than competitors' standard policies, including the one you have now. XYZ then starts offering a pay-as-you-go policy and boasts that it's a big discount off XYZ's standard policy. But it's only a discount compared with XYZ's own standard policy -- you're not really getting a break compared with the lower-priced standard policy you have now.

The point is not to assume that a pay-as-you-go policy is automatically going to be better. Compare XYZ's pay-as-you-go plan with your current non-XYZ standard policy to decide whether the switch is right for you.

Counting the miles

Heller also is concerned about how insurers are going to track mileage. Hull says CSE is ready to for multiple tracking plans when it launches. Drivers can use an honor system of self-reporting online, with agents spot-checking odometers. CSE also is looking into tapping other third parties, such as official state inspection stations or even oil change shops, for mileage checks, although that plan is still in the works.

A more controversial system, which also should be available from the outset, is the use of technology for mileage tracking. Hull says CSE plans to use a special device the size of a matchbox that could be hooked into a port that's been available in most every car since the late 1990s. It would transmit mileage information directly to the insurer. Hull says this device would be free to drivers who want this option.

This isn't an entirely new concept: The OnStar system can report mileage; in fact, GMAC Insurance is offering discounts to those who limit mileage and use OnStar to report it. Various onboard computers also can collect and transmit mileage data.

So far, so good. But such technological system can report other aspects of a car's use -- and that's why some drivers may not select this option. They're worried the device will track incidences of speeding, for example. Hull says these concerns, at least in California, are unfounded, because state regulations do not allow insurers to use any of this data -- except for mileage -- in setting insurance rates.

Starting small

CSE is a relatively small company that sells insurance only in California, Arizona, Nevada and Utah; it has fewer than 20,000 auto policies in California, so it’s unclear how influential its pay-as-you-go program will be. Also, it’s too early to gauge its effect or even to get more details. The California Department of Insurance approved the CSE program in mid-September. CSE still must work out details and won't be selling policies until January 2012, at the earliest.

Heller hopes the concept goes national. "A program like this should be studied by (insurance) regulators around the country and promoted as a new tool," he says.

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