Pay-as-you-drive discounts: a guide

By Posted : 04/22/2015

OdometerEveryone loves car insurance discounts. Low-mileage discounts are about as simple as they get.

You can get a low-mileage discount in one of three ways.

The first way is to estimate your mileage when you enroll, though some insurers may ask for periodic verification. Savings from these discounts average about 2 percent nationwide for annual mileage below 7,000, according to comparative data gathered by Quadrant Information Services, but can be as high as 20 percent in California, where laws favor low mileage as a rating factor, or virtually nonexistent in Hawaii, where high mileage is harder to rack up.

The second way is to let insurance companies actually measure your mileage. Most major insurance companies offer a pay-as-you-drive (PAYD) program that places a reporting device in your vehicle and offers a discount at renewal time.

Most insurers who offer PAYD claim safe, conscientious drivers can save as much as 30 to 50 percent if they drive infrequently. It also helps if you avoid roads during peak accident hours, usually between midnight and 4 a.m. Some will record hard braking events and speed. (See an overview of pay-as-you-drive plans from major insurance carriers.)

The third way to get a low-mileage discount is pure pay-by-the-mile, currently offered by one company in only a few states, where how much you drive directly affects the next month’s bill.

Who saves the most from pay-as-you-drive policies?

If you listen to car insurers, they're eager to say that the pay-as-you-drive model is gaining speed in the marketplace. Progressive sounded the fanfare not long ago by announcing its Snapshot plug-in has tracked more than 10 billion customer miles.

But despite those heady numbers, many motorists still have questions about what pay-as-you-drive (also known in the industry as UBI, for usage-based insurance) is, what you need to get it and what to expect when you have it.

These pay-as-you-drive models are first and foremost a reward for low-mileage drivers. After all, drivers who are on the road less pose fewer risks to an insurer’s bottom line.

The biggest breaks go to those who drive the least. Some insurers like Progressive and Allstate (through its Drive Wise program) also use the plug-ins to monitor the time of day you drive and if you brake hard.

State Farm's Drive Safe & Save program and GMAC Insurance's Low Mileage Discount base rates primarily on mileage, but you have to have OnStar or Sync to qualify because these telematics-based subscription services, not a plug-in, track the numbers.

In other words, you should drive much less than average and during daylight hours, giving the guy in front of you plenty of room so you can avoid panic stops.

“The plans are a great way for the lowest-risk drivers to save money,” says Des Toups, Insurance.com managing editor. “But be realistic if you drive a lot or have a lead foot. You don’t want to count on a discount that might not materialize.”

How pay-as-you-drive systems work

Most of the plug-ins operate the same way: You stick the telematics gizmo in your vehicle's diagnostic OBDII port (most cars beginning in 1996 have them) near the steering wheel and it records and reports your driving habits.

The OBDII plug-in devices typically aren’t compatible with hybrid or electric cars, and because they recognize your car’s VIN they cannot be swapped into another vehicle.

Most of the big insurers, including Progressive, let you test-drive the gizmo for a month before making a decision.

Once data is sent to the insurance company, it is available to you through a website or app, so you can see how specific driving behaviors affect your rates.

You must return the device when you switch insurers, buy a different car or leave the PAYD program. If you don’t, you’ll have to pay for it.

MetroMile, an upstart insurer that began writing policies last year, is the only one currently offering a plug-in that ties a policy's price solely to miles driven and sends a monthly bill. It's available in California, Illinois, Oregon, and Washington, although CEO Dan Preston says it hopes to eventually expand to more states.

There are other methods of tracking customer mileage and behavior. Several insurers use General Motors’ OnStar or Ford’s Sync communications system to report mileage data, but PAYD via smartphone, which is widespread in Europe, is only just now reaching the U.S. 

How much can you save with pay-as-you-drive plans?

Many companies offer an introductory discount of 5 to 10 percent that applies until the incoming data is used to calculate the discount off your next renewal.

Once the data is used to calculate your discount, the amount can change at each renewal period.

Dave Pratt, general manager of usage-based insurance for Progressive, says the discount through Snapshot could reach 30 percent but adds that a 10 to 15 percent is more common. That's about a $150 yearly savings for most customers, he says.

State Farm says the discount for its In-Drive plug-in could even reach 50 percent, although that's for near-perfect drivers. The company explains that you immediately receive a 5 percent discount for signing up. Another 20 percent might be clipped from your payments if you stay below 12,000 miles a year, the national average.

Some policyholders have long worried that insurers could use the information to actually hike premiums for poor drivers. Until recently, that's not been the case.

But Progressive has begun to roll out the possibility of surcharges, or increases, on newly enrolled Snapshot participants whose more aggressive driving behavior merits them.

So far, other carriers have not followed suit.

Who can see your driving data?

PAYD devices can do far more than just record mileage. They can measure speed, acceleration, cornering, braking and location, though current plans do not calculate discounts based on GPS data.

The Electronic Privacy Information Center (EPIC) has questioned if the gathered information could be used in advertising targeted at motorists or shared with police during accident investigations. Further, they wonder if the data could affect someone's driving score, which could adversely affect rates.

Academics have also weighed in. University of Washington law professor Anita Ramasastry has researched PAYD models and cautions that the information sharing, if not controlled, could even reach the workplace. What if insurers provided employers with your profile? Would they be less willing to hire someone with aggressive motoring habits?

"The fact that someone drives a lot late at night, for example, may be interpreted by an employer as a sign that he is not going to stay awake or alert at work, or that he is a late-night partygoer," she says.

Not to worry, say insurers. State Farm points to the company website for privacy information. The site offers some details, including that "we do not allow those who are doing business on our behalf to use our customer information for their own marketing purposes."

Progressive's website has this: "We won't share Snapshot data with a third party unless it's required to service your insurance policy, prevent fraud, perform research or comply with the law. We also won't use Snapshot data to resolve a claim unless you or the registered vehicle owner gives us permission."

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