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Pricing plans
General Info
Coverage Levels
Public Policy
Pricing Plans
Except for government-mandated liability insurance, most car insurance plans
charge a premium based on several risk factors that are likely to have an
impact on the frequency of occurrence or on the expected cost of future claims.
The premium usually depends on the car characteristics, the coverage selected
(deductible, limit, covered perils), the usage of the car (commute to work or
not, predicted annual distance driven), driving history, as well as the age and
sex of the driver.
For mandatory liability insurance, in some countries risk factors are taken into
account (giving varying prices) and in others a fixed rate is charged
regardless of the individual circumstances.
Exposure bases
Flat rate
Car insurance plans routinely charge a flat per-car/per-year price regardless of
how much the car is used. Since a time unit provides no actual measurement of
the actual miles of driving exposure each car consumes during the insured year,
insurers have no credible statistical basis for the cost comparisons used to
support price classifications.
Reasonable estimation
As a sales enhancement, many car insurers offer a "low estimated future mileage"
discount to customers who predict that the car's mileage will be below some
stated limit during the next premium period. There is no verification involved
and no additional charge if the car is subsequently driven more than the stated
amount. This arbitrary discount tends to foster customer belief in the mistaken
idea that "miles" are just one of many classification factors used to raise or
lower prices from the territorial base rate. In fact, odometer miles (which
insurers do not use) are not a factor but a metric - the only valid basis for
measuring each car's consumption of insurance protection in on-the-road use.
Odometer-based systems
Cents Per Mile Now advocates classified odometer-mile rates. After the company's
risk factors have been applied and the customer has accepted the per-mile rate
offered, customers buy prepaid miles of insurance protection as needed, like
buying gallons of gasoline. Insurance automatically ends when the odometer
limit (recorded on the car’s insurance ID card) is reached unless more miles
are bought. Customers keep track of miles on their own odometer to know when to
buy more. The company does no after-the-fact billing of the customer, and the
customer doesn't have to estimate a "future annual mileage" figure for the
company. In the event of a traffic stop, an officer could easily verify that
the insurance is current by comparing the figure on the insurance card to that
on the odometer.
Critics point out the possibility of cheating the system by odometer tampering.
Although the newer electronic odometers are difficult to roll back, they can
still be defeated by disconnecting the odometer wires and reconnecting them
later. However, as the Cents Per Mile Now website points out: "As a practical
matter, resetting odometers requires equipment plus expertise that makes
stealing insurance risky and uneconomical. For example, in order to steal
20,000 miles of continuous protection while paying for only the 2,000 miles
from 35,000 miles to 37,000 miles on the odometer, the resetting would have to
be done at least nine times to keep the odometer reading within the narrow
2,000-mile covered range. There are also powerful legal deterrents to this way
of stealing insurance protection. Odometers have always served as the measuring
device for resale value, rental and leasing charges, warranty limits,
mechanical breakdown insurance, and cents-per-mile tax deductions or
reimbursements for business or government travel. Odometer tampering—detected
during claim processing—voids the insurance and, under decades-old state and
federal law, is punishable by heavy fines and jail."
Under the cents-per-mile system, rewards for driving less are delivered
automatically without need for administratively cumbersome and costly
technology. Uniform per-mile exposure measurement for the first time provides
the basis for statistically valid rate classes.
GPS-based system
In 1998, Progressive Insurance started a pilot program in Texas in which
volunteers installed a GPS-based technology called Autograph in exchange for a
discount. The device tracked their driving behavior and reported the results
via cellular phone to the company. Policyholders were reportedly more upset
about having to pay for the expensive device than they were over privacy
concerns .
In 1996, Progressive filed for and obtained a US patent (US patent 5,797134) on
their process. Progressive has also filed corresponding patent applications in
Europe and Japan. English auto insurer, Norwich Union, has obtained an
exclusive license to Progressive's European patent application. They have
recently completed a successful pilot test of the technology and it is now
available commercially under the tradename "Pay As You Drive"(tm).
OBDII-based system
In 2004, the company launched another pilot program to allow policyholders to
earn a discount on their premiums by consenting to use its TripSense device.
TripSense connects to a car's OnBoard Diagnostic(OBDII) port, which exists in
all cars built after 1996. The discount is forfeited if the device is
disconnected for a significant amount of time.
Article courtesy of Wikipedia.org
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