A:

To an extent, auto insurance rates are specifically developed based on individual user information. The criteria traditionally considered when determining auto insurance rates include the driver's accident history, type of car they drive, state, age, gender and marital status. However, another factor can be directly linked to the risk an individual presents to an insurance company: the number of miles he or she drives each year.
Pay-as-you-drive auto insurance offers a way of charging drivers based on the actual amount they drive, further individualizing the premium development process. The theory is, the less an individual drives, the less they're on the road and the less likely they are to have an accident. This type of policy almost works the same way as a pay-per-minute cell phone plan except that the "usage" is based on a theory of risk rather than actual usage of auto insurance benefits.

Pay-as-you-drive auto insurance is currently offered in more than 25 U.S. states through several insurers. These companies may use a proprietary onboard device that measures mileage, or they may use OnStar. It's important to note that with pay-as-you-drive insurance, mileage is not the only factor used in establishing rates. It's simply added to the other existing underwriting criteria.

Drivers aren't the only ones excited about the emergence of this new method of determining insurance rates; environmental groups are hopeful that pay-as-you-drive insurance will encourage less driving in order to save money, which could have a positive effect on the environment.

RELATED FAQS
  1. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  2. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
  3. What are examples of the largest companies in the insurance sector?

    Read about some of the largest and most influential companies in the insurance sector, a list that includes Berkshire Hathaway ... Read Answer >>
  4. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
  5. What is the usual profit margin for a company in the insurance sector?

    Learn what the average profit margin is within the insurance industry, and what factors can affect the profitability of an ... Read Answer >>
Related Articles
  1. Insurance

    6 Things That Spike Your Auto Insurance

    Several factors can cause your auto insurance to rise. Knowing what these are can help you find the best deal.
  2. Insurance

    Top 5 Car Insurance Companies in Texas (PGR, ALL)

    Examine the five biggest automobile insurance companies operating in the state of Texas, ranked based on market share in the state.
  3. Insurance

    What Happens If You Lie on a Car Insurance Application

    The majority lies to save on premiums – but consequences can be severe for not owning up to things like tickets, accidents and how much you drive your car.
  4. Insurance

    Car Insurance Rates Too High? Check the Record

    Your driving history is clean as a whistle yet your premium has shot up. Here’s how to find out why – and what you can do about it.
  5. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  6. Insurance

    12 Car Insurance Cost-Cutters

    If car costs are dragging you down, find out how to free yourself from some of the extra weight.
  7. Financial Advisor

    4 Ways Retirees Can Save on Insurance

    Retirement doesn't mean the end of the road, nor does it mean paying full price for insurance. Carriers reward age and less risky behavior with discounts.
  8. Insurance

    Auto Insurance: Paying By The Mile Vs. Monthly

    Would you benefit if you bought your auto insurance by the mile instead of simply paying a flat monthly premium?
RELATED TERMS
  1. Auto Insurance

    A policy purchased by vehicle owners to mitigate costs associated ...
  2. Preferred Auto Coverage

    Auto insurance offered to drivers considered to fall into the ...
  3. Personal Lines Insurance

    Property and casualty insurance products for individuals that ...
  4. Black Box Insurance

    An insurance program that offers premiums based on current driving ...
  5. Actuarial Equity

    The calculation of an insurance premium based on crucial factors ...
  6. Bureau Rate

    A standard price per unit of insurance set by a state's insurance ...
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  3. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  4. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
  5. Custodian

    A financial institution that holds customers' securities for safekeeping so as to minimize the risk of their theft or loss. ...
  6. Supply Chain

    The network created amongst different companies producing, handling and/or distributing a specific product. Specifically, ...
Trading Center