Pay-As-You-Drive Car Insurance

Published April 21, 2008

The latest New York Times column by pop economists Steven Levitt and Steven Dubner—of Freakonomics fame—focuses on the negative externalities associated with driving. In other words, the hidden costs that are distributed throughout society each time a single driver starts up a car. According to Levitt and Dubner, the three major auto-related negative externalities are worth $20 billion dollars a year in carbon emissions costs, $78 billion dollars a year in traffic congestion costs, and $220 billion dollars a year in accident-related costs.

For traffic congestion and carbon emissions costs, there are already some built-in deterrents—such as wasted time and constantly rising fuel costs—that incentivise driving less. Unfortunately, drivers who only drive a few thousand miles a year, and are therefore much less likely to be involved in an accident, have no similar incentives, such as savings on their car insurance.

Thanks to a pilot program at Progressive Auto Insurance, that may change in the coming years. Drivers that sign up for Progressive's MyRate program will have a wireless device installed in their cars that will calculate how many miles they drive, allowing them to pay only for the accident risk they incur in each mile. According to the Brooking Institution, a widespread pay-as-you-drive approach to calculating car insurance rates could save Americans around $52 billion dollars a year.