When the Massachusetts Clean Energy and Climate Plan came out on December 29, laying out roughly 40 policies to get the state’s greenhouse gas emissions to 25 percent below 1990 levels by 2020, the proposal to test a fledgling concept called Pay-As-You-Drive (PAYD) (See page 61) auto insurance emerged as the plan’s poster child. We at CLF felt like proud parents. You see, CLF devised the concept of PAYD auto insurance more than a decade ago as a market-based solution to reduce greenhouse gas emissions and combat climate change. Over the past 10 years, in addition to offering partially mileage-based insurance policies through its Environmental Insurance Agency (EIA) subsidiary of CLF Ventures, CLF has engaged insurance industry leaders, regulators, policymakers, and the environmental community in exploring the potential for PAYD to be implemented on a broad scale.

True PAYD, which is not currently offered in Massachusetts (or any New England state), is priced based on the number of miles a policy holder drives, after taking into account traditional rating factors like where the car owner lives and their driving history. By creating a variable structure for insurance rates, as an alternative to the current fixed annual premium, PAYD would provide a powerful incentive for drivers to reduce their mileage. Put simply: drive less, pay less.

Does that mean the corollary is drive more, pay more? Not necessarily. In November, 2010, CLF and EIA released the results of a study that showed that if auto insurance were priced by the mile, drivers would reduce their mileage, lowering their accident risk while also reducing fuel consumption, greenhouse gas emissions and traffic congestion. It also showed that car owners, regardless of where they live or work, could save money under a PAYD system if they drive fewer miles than the average for their area. Because a PAYD system by design reduces risk and accident costs, ultimately insurance prices would come down for the lion’s share of drivers.

Unlike the current insurance model that generally doesn’t care how much someone drives, the PAYD system would ensure that drivers pay their fair share for the amount of risk they incur, and eliminate the subsidy that low mileage drivers currently pay for high mileage drivers.

More data are needed to understand how to make PAYD work for as many Massachusetts drivers in as many different situations as possible. A flexible program that benefits the broadest spectrum of drivers is the key to gaining the widespread adoption needed to achieve the maximum environmental, public health and economic benefits of PAYD.

Could PAYD, which would help the state meet its climate goals and reduce accident costs while giving car owners more control over their auto insurance pricing, work in Massachusetts? We think so, and a pilot program is a great way to find out.

What do you think? Could PAYD benefit you?