Calif. Pay-As-You-Drive Auto Insurance Programs Differ on Mileage Categories

OdometerCalifornia auto insurance regulators approved the state’s first two pay-as-you-drive programs earlier this month, but, like most issues that have a bearing on how insurers rate drivers, differences exist between the ways in which the two companies — State Farm and the Automobile Club of Southern California — have set up their mileage categories, or “bands.”

As part of state law, all insurers in California must take annual miles driven into account when calculating premium prices. In fact, the number of annual miles driven must have the second highest weight of the 19 factors that can be used to rate California car insurance policies.

This is because more time on the road means more time to get into an accident and file a claim. The higher the risk of filing a claim, the higher the premium is likely to be. And up until this past month, Golden State insurers had nothing but a policyholder’s estimate to go off of when factoring in annual miles traveled.

In response to the introduction of pay-as-you-drive, which allows insurers to collect data about the annual miles driven either through odometer readings or in-vehicle devices, State Farm has set up two sets of mileage categories for California policyholders.

According to the insurance department’s deputy press secretary, Dave Althausen, this rating factor for State Farm policyholders who estimate their mileage is dependent on whether they’ve driven between 0 and 7,500 miles or 7,500 miles and over. But if they have opted to voluntarily let the insurer verify their mileage, there are many more categories.

For pay-as-you-drive customers, annual miles driven is divided up into 500-mile increments. So if Driver A and Drive B have identical risk profiles, aside from annual miles driven, but Driver A drove 999 miles and Driver B drove 1,001 miles, Driver B may be rated differently for this category.

This is the case for up to 19,000 miles. After the 19,000-mile mark, all drivers are rated the same for annual miles traveled. So a person who drives 19,001 miles in a year will be rated the same as someone who drives 25,000.

For policyholders who get coverage from the Auto Club, though, the categories are larger and have a higher range.

According to Althausen, the Auto Club’s pay-as-you-drive rating plan includes a 15,001-to-20,000 category and a 20,001-to-25,000 category.

The way the Auto Club’s plan works is if policyholders underestimate the number of miles they will drive in a year to the point where they end up in a category above what they predicted, the Auto Club could see an increase in premiums at renewal. The opposite would happen for an overestimation.

“However, if the person switches from just estimating their mileage to verifying their mileage, the premium at renewal would go down even if they went up to the next band” says Althausen. “This is because in general the rates charged for those who verified their mileage are less than for those who estimate their mileage, even if the verified mileage would be in the next highest band.”

About Ben Zitney
Benjamin Zitney has been covering the auto insurance industry for the past 2.5 years. Before coming to Online Auto Insurance News, he produced an extensive company history of the 30-year-old California Joint Powers Insurance Authority and worked at the Cal State Long Beach Daily Forty-Niner as a reporter, copy editor and news editor.

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