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California motorists soon to have pay-as-you-drive insurance option

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In 1988, Proposition 103's sweeping insurance reforms required insurance companies use actual miles driven as the second mandatory factor to set rates. After nearly two decades of appeals, California motorists will finally have the option of choosing a pay-as-you-drive (PAYD) plan under new regulations proposed by California Insurance Commissioner Steve Poizner in July.

PAYD insurance allows motorists to link their premium to the actual number of miles they drive, which would be verified through odometer readings, maintenance records or the use of a technological device.

Harvey Rosenfield, author of Proposition 103 and founder of Consumer Watchdog, the Santa Monica, Calif.-based insurance advocacy group, said the regulations "will lower auto insurance premiums, particularly when the high cost of gasoline is encouraging people to drive less.

According to a July study released by Washington, D.C.-based Brookings Institution, 64 percent of California households would have lower premiums under PAYD and save an average of $276 per vehicle annually. The study indicates low-wage earners, who typically drive less, would benefit more; however, even in higher income groups, a majority of households would save money.

Environmental groups also support the proposed regulations. The Environmental Defense Fund estimates that if 30 percent of drivers participate, the state could reduce CO2 emissions by 55 million tons between 2009 and 2020, the equivalent of taking 10 million cars off the road. The California Air Resources Board has recommended the adoption of PAYD as one way to save fuel and meet emission reduction targets.

"I am thrilled to pave the way for California drivers to obtain insurance that is more environmentally friendly and more accurately reflects driving habits," said Commissioner Poizner. "As a strong advocate of healthy market competition and a healthy environment, I am especially pleased to encourage this kind of innovation and additional options for consumers."

Thirty-four states offer various forms of mileage-based insurance, as does Canada, Japan and parts of Europe. GMAC Insurance Group, which runs a mileage-based plan through General Motor's (NYSE: GM) OnStar system has reduced premiums in other states by 13 percent to 54 percent.

PAYD may give California consumers an incentive to go green while driving less and saving money, but if some insurance companies and industry groups have their way, that savings could come at the expense of the consumer's privacy.

Current and new regulations specify three mandatory factors for setting car insurance rates in California: driving safety record, miles driven annually and years of driving experience. Insurers may consider 16 additional factors; however, quality of miles driven is not one of them.

Some insurers, including the Auto Club Enterprise Insurance Group (AAA) and State Farm Mutual Auto Insurance Co., two of California's five biggest auto insurance providers, are pushing for technological devices that would allow them to collect mileage characteristics including time of day, day of the week, speed, acceleration and braking habits, and aggressive maneuvers in addition to actual miles driven.

Jeffrey Spring, spokesman for the Automobile Club of Southern California, said he didn't know if the company would be offering a PAYD option to its members.

"We're looking at the possibility -- we don't really know how it's going to be enacted. We're interested in anything that will help us provide more accurate rates for our members," said Spring.

Progressive Casualty Insurance Co. is already using a device to collect characteristic data and set rates for its MyRate insurance plan in seven states. Progressive's "behavior-based" plan is designed primarily for low-risk drivers. Company spokeswoman Leah Knapp said Progressive is studying California's new regulations.

"From our experience, mileage by itself is a moderate predictor of risk. But how you drive (driving behavior) is even more predictive," Knapp said.

Progressive, in the early stages of testing new pricing models, anticipates current plan participants will save 10 percent to 15 percent, according to Knapp.

State Farm public affairs specialist Mike Rossman said, "Our primary concern is how to figure out verifiable miles. An easier option may be checking in to an office. It doesn't have to be GPS."

Allstate Insurance Group spokesman Peter DeMarco said the company supports the proposed regulations if mileage-based rates are an option and not mandatory for customers.

"I don't think we're very excited about an electronic device," DeMarco said. "It could be that annual verification seems to be a better approach. We're more inclined to go that way."

The public has 45 days to comment on the new regulations and a hearing has been scheduled for October. Poizner will have up to a year to approve the final regulations, after which insurers can apply to offer the PAYD option to consumers.

"We're strong supporters of mileage-based insurance," said Carmen Balber, Consumer Watchdog advocate. "The real question is whether or not the insurance commissioner is going to allow them to collect additional data."

James is a Carlsbad-based freelance writer.

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