Measuring per Mile Risk for Pay-As-You-Drive Automobile Insurance

This study examines the relationship between accident costs and annual miles driven with mileage and claims data representing approximately 3 million individual car years of insurance exposure for private passenger automobiles in Massachusetts in the 2006 policy year. Poisson and linear models relating pure premium to annual mileage estimates demonstrate that mileage is a significant predictor of insurance risk, that mileage alone cannot replace traditional rating factors such as class and territory, and that mileage gains in explanatory power when used in conjunction with those traditional rating factors. These findings provide a strong actuarial basis for pay-as-you-drive insurance, in which drivers are charged rates per mile that differ depending on the driver's class and territory. A model of consumer response to pay-as-you-drive insurance based on studies of miles elasticity to gasoline prices suggests that if all drivers in Massachusetts switched to per mile insurance policies, aggregate vehicle miles traveled in the state would drop by 5.0% to 9.5%. Greenhouse gas emissions from private passenger automobiles would be reduced by a similar amount, and the social equity implications of pay-as-you-drive insurance would be positive. On the basis of sound actuarial justification and positive social benefits, this study finds a strong argument in favor of the regulatory approval of pay-as-you-drive insurance.