New Study Positively Linking Mileage to Risk Makes Case for Pay-as-You-Drive Auto Insurance | Conservation Law Foundation

New Study Positively Linking Mileage to Risk Makes Case for Pay-as-You-Drive Auto Insurance

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Insurance Pricing that Rewards Car Owners for Driving Less Reduces Burden on Insurers, Consumers and the Environment
Karen Wood, CLF:, 617) 850-1722 or
David Thayer, Environmental Insurance Agency: (617) 850-1779 or

BOSTON, MA November 17, 2010 – A new study, commissioned by the Conservation Law Foundation and the Environmental Insurance Agency, has found a significant correlation between miles driven and risk and confirms that mileage is an accurate predictor of risk, laying the groundwork for adoption of alternative auto insurance pricing models based on mileage. Overall, the study confirms the actuarial soundness of Pay-As-You-Drive (PAYD) auto insurance pricing and indicates that the PAYD approach would significantly reduce miles driven, auto accident losses, insurance costs and greenhouse gas emissions, creating a win-win-win situation for insurers, consumers and the environment. Among the key findings are that PAYD can save consumers money and is a more accurate and fairer way to price insurance, and that PAYD reduces vehicle miles traveled (VMT), accidents and fuel consumption by 5-10%.

The study, written by Massachusetts Institute of Technology (MIT) professor Joseph Ferreira, Jr. and Eric Minikel, is the first of its kind linking real miles driven with actual claims filed, analyzing $502 million of claims on over 3 million cars for a total of 34 billion miles. The findings are based on a statistical analysis of insurance and mileage data from the Commonwealth of Massachusetts, made available to the public last March and used for the first time for this study. PAYD auto insurance is a type of insurance that is priced at a cents-per-mile rate, rather than as the traditional lump sum premium. PAYD insurance is designed to encourage drivers to reduce the amount of miles they drive, saving money, reducing their risk and their impact on the environment.

“This comprehensive study provides a long-awaited and much-needed actuarial case for Pay-As-You-Drive insurance, a powerful catalyst for reducing vehicle miles traveled and realizing the direct reductions in greenhouse gas emissions so crucial to meeting our climate goals in Massachusetts,” said John Kassel, president of Conservation Law Foundation. “We believe that the proven benefits to business, consumers and the environment spelled out in this study make a compelling case for adoption of PAYD in Massachusetts and beyond.”

An Actuarial Basis for PAYD

The study fills an industry gap, providing an unprecedented analysis of the relationship between mileage and risk and the actuarial basis for PAYD. While prior research has shown that risk increases with mileage, the precise nature of the relationship at the individual level has not been well understood to date. Using extensive insurance and mileage data from Massachusetts, the study analyzes the correlation between annual miles traveled and insurance risk for individual vehicles insured on private passenger insurance policies and categorized by rating class and territory. The size and comprehensiveness of the dataset allowed for an exploration of the implications of PAYD insurance at a level of detail, and with attention to underlying accident risk, that has not been possible to date.

Joseph Ferreira, Jr., professor of Urban Planning and Operations Research in MIT’s Urban Studies and Planning Department and the author of the study, said, “The size and scope of this dataset allowed us for the first time to examine in detail how mileage interacts with traditional rating plans. The findings show that there is potential for a Pay-As-You-Drive system that takes into account when, where and how one drives to benefit the large majority of policyholders in Massachusetts, if it is built and implemented appropriately. This study is an important step in that direction.”

Among the key findings:

PAYD Saves Money and is a More Accurate and Fairer Way to Price Insurance
By basing premiums at least partly on mileage, PAYD provides individual policyholders more control over their insurance costs and more accurate premiums for the type of driving they do. PAYD pricing reduces inequities by eliminating the subsidies low-mileage drivers currently pay for high-mileage drivers in the traditional pricing system. Additionally, the study shows that, even though suburban and rural car owners tend to drive more miles than urban car owners, their per mile charges would be lower. If they drive less than the average for their area, they would pay less for actuarially-priced PAYD insurance than they do today under the existing system.

PAYD Reduces Vehicle Miles Traveled (VMT), Accidents and Fuel Consumption by 5-10%
The study estimates that switching all Massachusetts drivers to pure per-mile auto insurance pricing would reduce mileage, accident costs, and fuel consumption by 9.5% and cut 2 million tons of CO2 emissions. Another model with a flat yearly rate, plus per mile pricing after the first 2000 miles, would reduce both figures by about 5%. Depending on a number of variables, including the amount paid per mile, the types of coverage provided and the availability of alternative modes of transportation to drivers, the reductions could range between 3 and 14%.

The study was prepared by MIT Professor Joseph Ferreira, Jr. and Eric Minikel for the Conservation Law Foundation, with support from the Surdna Foundation, the Transportation Alliance and the Environmental Insurance Agency, and in collaboration with the Massachusetts Institute of Technology. The report and more information about PAYD may be found at CLF’s website.

The Conservation Law Foundation (CLF) works to solve the most significant environmental challenges facing New England. CLF’s advocates use law, economics and science to create innovative strategies to conserve natural resources, protect public health and promote vital communities in our region. Founded, in 1966, CLF is a nonprofit, member-supported organization with offices in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

The Environmental Insurance Agency (EIA) is leading efforts to bring mileage-based insurance to all of New England and working to establish a national green auto insurance certification program with a coalition of leading environmental and consumer groups. EIA markets auto and homeowners’ insurance in Massachusetts and New Hampshire and collaborates with leading environmental non-profit organizations to offer their members discounts on these unique products.