Washington, D.C. April – A proposal which would end the excess profits auto insurers make at the expense of lower and moderate mileage drivers has been developed by the National Organization for Women. The model legislation—called the Per Mile Auto Insurance Option Act—has been distributed with background materials to all members of Congress. The Act would give car owners a choice of paying at a cents per mile rate for miles the car is actually driven or staying with the current method of a fixed charge for unlimited mileage.
The Per Mile Option will especially benefit women, older people, and other lower income groups by enabling them to control spending for auto insurance the same way they can now economize on gasoline. Although women's driving is increasing, as a group they are still driving about half men's average mileage. Therefore, women still pay on average about twice what men pay per mile for the same insurance protection.
At a per mile rate, however, any car owner could save on insurance by driving less.
An urban household, for example, given a choice between paying a $1,000 a year charge for unlimited mileage and paying 10¢ per mile could choose the per mile option, drive the car 7,000 miles during the year, and save $300—less a nominal odometer checking fee. Or, a household in the country with a choice between a $500 charge and paying 5¢ a mile, could choose the per mile option, drive 7,000 miles, and save nearly $150. Per mile prices would be based on measured cost, as required by existing state insurance law.
To allow car owners to compare costs, the Act requires a company to use the same risk class definitions for both options. The per mile option classes would mirror the current risk classes to which insurers assign each car according to territory, driver demographics, and declared car use. Class prices would be expressed in units of cents per vehicle mile traveled as well as dollars per car year.
Any car owner could avoid the nominal fee and minor inconvenience of an annual odometer check by staying with a fixed charge for unlimited mileage. However, as owners switch their less-driven cars to the per mile classes, the average mileage of each time period class would rise, resulting in a higher average exposure to risk of accidents and a higher fixed charge.
This effect helps to explain why availability of the per mile option must be mandated by law. Company actuaries have admitted at rate hearings that they overcharge lower mileage customers. Overcharging lower-cost customers is known among insurers as skimming the cream. Their excuse: they need the extra profits to compete for higher-cost customers.
Indeed it is true that most higher mileage drivers own newer cars and are also a good market for other types of insurance. These car owners are now favored by time-period charges which average the cost of insuring all cars in a class without regard to large differences in individual vehicle miles. They probably would be quick to change if offered a lower fixed all-you-can-drive charge by companies not providing the per mile option. But however a company uses its excess profits from lower mileage cars, no company would give them up voluntarily.
The Per Mile Option Act conforms to the principle of state insurance regulation by allowing any legislature to opt out of the Act's provisions. It shares this strategy with the proposed federal Auto Choice Reform Act of 1997 (H.R. 2021 and S. 625) which would allow motorists to give up some rights to sue in exchange for lower premiums and more assured payment for medical and other expenses.
Sponsors of the Auto Choice Reform bills cite a study by the congressional Joint Economic Committee predicting that, under the Act, "the average female driver could cut their insurance premiums by more than $200 a year simply by choosing a different auto insurance plan."
Under NOW's Per Mile Option proposal, however, any individual can reduce their insurance expense $200 or more in proportion to how much driving they do without changing their insurance plan. Under the Per Mile Option Act, auto insurers would probably require prepayment for per mile insurance (unlike metered utilities); odometer readings would serve to show the limit of policy protection paid; car owners would buy miles of protection at the cents-per-mile price determined by risk class and coverage and would be responsible for buying more miles as needed to keep the car insured, as required by law in most states.
Current odometer law is sufficient to deter fraud; private company methods of mileage auditing and odometer checking would readily become efficient and economical under the pressure of competition on service and cost. A policy provision would automatically make the car uninsured if the odometer is tampered with.
Contact: Patrick Butler, NOW Insurance Project Director