Sep 19 2008

Can Auto Insurance Reform Help California Go Green?

Californians have one month left to register their views on an innovative proposal by the state Department of Insurance to help the environment by fundamentally reforming the way we pay for auto insurance.

The new insurance option, proposed by Insurance Commissioner Steve Poizner, would let drivers pay by the mile, linking their costs more closely to actual car use--and thus car pollution--than is the case with traditional premiums. His proposal has reportedly been endorsed by the California Air Resources Board.

A study published this summer by the Brookings Institution in Washington, D.C. explained the linkage between auto insurance and the environment:

The current lump-sum pricing of auto insurance is inefficient and inequitable. Drivers who are similar in other respects--age, gender, location, driving safety record--pay nearly the same premiums if they drive five thousand or fifty thousand miles a year. Just as an all-you-can-eat restaurant encourages more eat­ing, all-you-can-drive insurance pricing encourages more driving. That means more accidents, congestion, carbon emissions, local pollution, and dependence on oil. This pricing system is inequitable because low-mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average.

A better approach is simple and obvious: pay-as-you-drive (PAYD) auto insurance. . . . With insurance costs that vary with miles driven, people would be able to save money by reducing their driving, and this incentive would lead to fewer driving-related harms. PAYD would also be more equitable because it would eliminate the cross-subsidization of insurance costs from low-mileage to high-mileage drivers.

The Brookings research team concluded that California would see significant benefits from such a scheme:

• PAYD would result in an 8 percent driving reduction from light-duty vehicles.
• Estimated gross annual social benefits from an 8 percent driving reduction total $10.8 billion based on current driving levels, and $21.1 billion based on 2020 projections.
• The California state government would save $54 million annually based on 2006 data and $60 million annually based on 2020 projections.
• PAYD would generate 7 to 9 percent of the total CO2 reductions needed to meet California's emissions targets for 2020.
• Nearly two-thirds (64 percent) of households in California would have lower premiums under PAYD. The average savings for that group would be $276 per vehicle per year (in 2007 dollars). Low-income drivers would benefit especially.

The Insurance Commissioner's office says it has scheduled a public hearing on October 20, at 45 Fremont St. in San Francisco at 10 a.m., to take final comments on the plan. If approved, the plan will take effect not later than next fall.

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