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Insurance by the mile makes cents, study says

BY: Bruce Mohl

A new study indicates there is a strong correlation in Massachusetts between the miles a car is driven and the number of automobile insurance claims and losses associated with that car, a finding that could change the way insurers charge for coverage.

The study, commissioned by the Conservation Law Foundation, linked mileage and claims for 2006 by matching vehicle loss data from insurers with odometer readings from annual vehicle inspections. The data indicate a fairly strong relationship between mileage and claims, but the link becomes much stronger when it is adjusted for a driver's experience level and the garaging location of the car.

The report's authors, MIT Professor Joseph Ferreira Jr. and transportation planner Eric Minikel, recommend insurers should continue to rate drivers based on where they live and their driving histories, but layer on top of that a mileage component. They recommend all drivers should pay a flat fee for 2,000 miles a year and a per-mile fee for each mile above that. They estimate their approach would reduce claims, mileage, and fuel consumption by at least 5 percent.

The advantage of the pay-as-you-drive approach is that it would give drivers a financial incentive to drive less, which would reduce fuel consumption and greenhouse gas emissions.

“Pay-as-you-drive would improve fairness by shifting weight in insurance pricing towards an individually controllable factor -- mileage -- rather than involuntary groupings, and by reducing or eliminating the cross-subsidy from low to high-mileage drivers,” the report says.

Most Massachusetts insurers currently offer a discount to low-mileage drivers but don’t charge high-mileage drivers extra. Plymouth Rock Assurance Corp. takes a slightly different approach. It calculates an average annual mileage for each area of the state and charges less for drivers in that area who drive less than the average and more for drivers who drive more than the average. No Massachusetts automobile insurer currently offers transparent cents-per-mile coverage.

State Insurance Commissioner Joseph Murphy said he is not aware of any legal barriers to companies implementing pay-as-you-drive policies in Massachusetts, but he said he hoped companies would not make a mileage approach mandatory. He said Progressive, which has experimented with mileage-based insurance elsewhere, has shown some interest in bringing it here.

Plymouth Rock is also interested. Ferreira is a consultant to the company and Paula Gold, the firm’s chief regulatory counsel, is also vice chairman of the Conservation Law Foundation. “A lot of people believe it is what will happen in the future,” Gold says.

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