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Non-Toll Pricing—A Primer

Overview of Mileage-Based Pricing Strategies

There are a number of specific strategies that fall into the broad category of mileage-based pricing. The overall level of incentive to reduce driving that results from deploying multiple mileage pricing strategies could be very large. For example, in 2003, the then-outgoing Executive Director of the National Research Council’s Transportation Research Board, Thomas Deen, delivered a speech calling for shifting as much as possible of what was then the equivalent of an average $0.50 per mile cost of driving to real-time variable charges (Deen, 2003). This section briefly discusses each of the available strategies that could together be deployed to come close to achieving a cost shift of this magnitude.

PAYDAYS Car Insurance

Consumers typically pay a flat annual or semi-annual fee for car insurance. For liability and collision coverage, which represent most of the cost of insurance policies, insurance claims will only result when the insured vehicle is being driven. Thus, the more someone chooses to use their vehicle, the greater the risk of a claim. Through PAYDAYS car insurance, companies more accurately bill their customers on the basis of crash risk and provide policyholders a financial incentive to drive less. The variance in insurance rates based on vehicle miles traveled (VMT) is generally insignificant today, although only a small percentage of insurance claims are made (such as for theft) when a vehicle is not being driven (through comprehensive coverage). A 2008 Brookings Institution study estimates that an 8-percent reduction in VMT, along with between $50 and $60 billion in annual net social benefits, would result if all fixed automobile insurance costs in the United States were converted to usage-based insurance. The study also estimates that 63.5 percent of all households would experience savings with PAYDAYS insurance, and such savings would amount to an average of $270 per vehicle and $496 per household, among households that do save (Bordoff & Noel, 2008). With PAYDAYS pricing, low-income drivers are projected to reduce their driving substantially more than others and thus would experience even greater savings than would the general population (Deakin & Harvey, 1996).

PAYDAYS insurance assesses individualized premiums based on miles driven instead of the calendar year and provides motorists a new option to save money by reducing their risk exposure through driving less. PAYDAYS premiums incorporate traditional risk factors, such as driving record and vehicle make and model, and reflect the coverage selected. Such insurance would be expected to result in a reduction in crashes and related insurance claims that are disproportionate (i.e., 1.34 times) to the mileage reduction and would reduce congestion and pollution (Greenberg, 2002).

By providing an affordable insurance option to low-income motorists who are willing to limit their mileage, PAYDAYS insurance would reduce the number of uninsured motorists. PAYDAYS insurance has been shown to be a better way to reduce gasoline consumption in terms of providing net public benefits than even gasoline taxes (Parry, 2005). Finally, government incentives to promote PAYDAYS insurance have been projected to be cost competitive in terms of reducing air pollution and saving lives with other government transportation-related expenditures aimed at achieving these objectives (Greenberg, 2002).

In the United States and even more so abroad, insurance premiums that are at least in part based directly on miles driven have been or are being piloted or offered in a few markets. In recent years, most of the major car insurance companies in the United States have been experimenting with technologies that would facilitate their offering PAYDAYS insurance if they someday choose to. A subset of these companies is seriously contemplating offering it in the near term, at least on a pilot basis.

From 1998 through 2001, Progressive Auto Insurance piloted PAYDAYS insurance with over 1,200 Texas drivers whose vehicles were equipped with global positioning system (GPS) devices. Individualized premiums under this “autograph” program included a small fixed charge and were primarily based on the number of minutes people drove and when and where they drove. Beginning in 2004, Progressive began its TripSense Program in Minnesota, Michigan, and Oregon. TripSense collected data—including miles and the time of day driven, hard acceleration, braking, and speed—from vehicle on-board diagnostic systems (which did not record driving location).

In 2008, Progressive launched its newest program, MyRate. It is the next generation of TripSense, providing cellular communication of the on-board diagnostic data from the vehicle to Progressive, expanding product availability to more states and affecting premiums more substantially. That is, although drivers could earn total discounts of up to 25 percent under TripSense, with MyRate, depending on state regulations, discounts of up to 60 percent and surcharges of up to 9 percent could be applied on renewal of the policy. Progressive representatives have said that with TripSense, the predecessor program to its newly launched MyRate, 34 percent of its customers who signed up for insurance by telephone or the Internet (but not via an agent) chose TripSense over Progressive’s standard product in the three states where TripSense was offered. Progressive also reported interest among over half its customers for PAYDAYS policies, as long as they could save money.

In January 2004, GMAC Insurance and OnStar jointly announced that drivers in Pennsylvania, Arizona, Indiana, and Illinois with active OnStar accounts, which are used to communicate vehicle mileage to GMAC Insurance, would be eligible to save from 5 percent to 40 percent on their car insurance, depending on in which of seven mileage categories the amount of their driving fell. By 2008, OnStar’s market penetration had grown to over 5 million subscribers in the United States, and a year of coverage became standard on every General Motors vehicle. The GMAC Insurance discount—which has increased to 54 percent for the lowest mileage drivers driving 2,500 or fewer miles per year and is at 13 percent for those driving between 12,501 and 15,000 miles per year—is available in most states to drivers who use OnStar.

Beginning in October 2008, MileMeter, a start-up insurance company, began to offer “insurance buy the mile” throughout Texas. Instead of purchasing coverage for 6 months or a year, a Texas motorist may purchase between 1,000 and 6,000 miles of coverage and make additional purchases as needed.

The on-line Transportation Demand Management Encyclopedia produced by the Victoria Transport Policy Institute includes information about PAYDAYS insurance internationally and regularly updates the status of such insurance offerings around the world. See http://www.vtpi.org/tdm/tdm79.htm for updates.

Car Sharing

Car sharing, or automated hourly neighborhood car rentals that substitute for car ownership, is an innovative, voluntary transportation-pricing measure that converts virtually all fixed-vehicle ownership costs to usage-based fees. It started in Europe and today is widely available in both European and U.S. cities. Car sharing allows households to get by without owning a car or owning fewer cars than they would otherwise need. Car-sharing vehicles are placed throughout neighborhoods. Users make reservations on the Internet and, as part of their membership in a car-sharing organization, are provided a smart card to access vehicles they have reserved. The car-sharing company pays all driving costs, including gas and insurance, in exchange for a member’s hourly fee. Most lower mileage households will save money by using car sharing instead of owning a car.

The best-studied car-sharing program in the United States is San Francisco City CarShare. Through the use of extensive travel surveying and a matched pair analysis, car-sharing membership was shown, independent of other factors, to result in seven fewer VMT per day. A key reason for this was the relatively significant reduction in car ownership among members when compared with non-members (Cervero et al., 2006). VMT reductions that result from car sharing have been found to be even more dramatic in Europe. In Switzerland, for example, car owners who sold their vehicle(s) and became Mobility CarSharing customers reduced their annual mileage driven by 72 percent, whereas new car sharers who had not previously owned cars did not drive more than they did before when they borrowed vehicles instead of sharing cars (Swiss Federal Office of Energy, 2000). Car sharing is also an important strategy in addressing urban parking woes. Twenty households typically share each car-sharing vehicle, thus reducing parking costs and the need to park around the office and housing developments.

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