Pay As You Drive Insurance (Insurance by the Mile)

TESTIMONY OF MITCHELL ROFSKY
President, Better World Club
Before the Oregon House Transportation Committee
HB 2043
February 25, 2003

My name is Mitchell Rofsky and I want to thank you for inviting me here to testify once again in support legislation in support of Pay as You Drive Auto Insurance. I hope this doesn't become a regular feature of each legislative session.

The Better World Club was formed to help disseminate 21st Century approaches to travel and transportation. We offer roadside assistance, travel, and insurance. Prior to becoming the President of Better World, I was President of the Working Assets Mutual Funds, one of the first socially responsible mutual funds in the country and the Chair of Business for Social Responsibility.

Better World strives to provide our customers with options, such as eco-travel, which enable them to be sensitive to the environment. Better World is the first travel company-in fact, the first consumer retail company-to have its consumer services certified by the Climate Neutral Network, a coalition of environmental groups such as the Natural Resources Defense Council and the World Resources Institute. When desired by our customers, Better World, through our Travel Cool! Program, has begun offsetting the carbon dioxide released into the atmosphere when each of us flies. We believe that if consumers knew how much carbon dioxide they were releasing into the atmosphere-and had an easy way to remediate it, Carbon Offsets could become the recycling of the 21st Century.

Much like Carbon Offsets, Pay as You Drive Auto Insurance is a step enabling drivers to recognize the real cost of driving-including the environmental cost. We have been selling auto insurance in Massachusetts for over 5 years and now offer auto insurance in 18 states, increasing to 42 states before the end of March. As a result, we are interested in this legislation because we would be very pleased to add mileage based auto insurance to our menu of environmentally-sensitive services.

Two years ago, I thought it important to emphasize what we aren't: an organization of actuaries. Well nothing has changed since then; we haven't gone to actuary school. I am not here to tell you that I have studied the issue and that the marginal cost of each driver mile is stable. Nor have I calculated the administrative costs that also impede going to a pure "pro-rata" mileage system. But just as two years ago, I believe these issues are surmountable:

· Insurance is like most other goods and services: there is a form of volume discount built into the product. The more you buy the cheaper it is. For many products this is fine, no big deal, good for both producer and consumer.

But for certain services, those that involve what economists call externalities-costs that producers don't have to take into account and thus do not pass on to consumers, pollution being a clear example of an externality-volume discounts are not so benign. The expense of the pollution, in this case, is not being built into the consumer's cost. People are incentivized to drive more and make poor substitution choices regarding transportation alternatives because they don't have accurate information on the real cost of their driving. Mileage-based insurance would give drivers much better information as to the total cost of driving and thus is worth encouraging.

· Mileage is strongly correlated with accident risk. It is not the only factor, of course. This program would not interfere with rating motorists by the quality of their driving. The traffic density of where one drives is also strongly correlated to accidents. But since it is difficult to tell where people are going to drive, insurance companies have made judgments-identified proxies-for traffic density. When viewed as part of a whole, mileage could be a pretty good proxy.

· Some insurance companies offer discounts for vehicles driven fewer miles per year, but these discounts are far from proportional to the difference in miles. A 50% cutback in miles usually elicits only a 5-10% rate discount.

· There are probably a number of reasons why underwriters haven't adopted this kind of program, but one reason is probably that the startup costs of a program to track mileage have proved too large.

· There is some interest from the auto industry. Progressive Insurance piloted usage-based insurance in Texas. The company uses global positioning satellite technology to base the cost not only on miles driven, but when and where the auto is being driven. Accident risk also varies as to whether it's night or day and how congested the roads are.

· People have expressed some concerns about the "privacy" rights of drivers: whether the technology used by insurance companies to measure mileage gives insurance companies too much information about car location, moving violations, etc.

My hope is that insurance companies and consumer groups can work this out. I understand that there are technologies, including the onboard equipment, which Progressive calls Autograph, that only generate so much information on the driver. I believe Autograph notes the position of the car 10 times each hour and radios that back to the company at specified intervals, so Progressive has a good idea how long the car was driven and where, but, not which road or neighborhood it travels. Progressive was interested only whether it was urban, suburban or rural, and what time of day.

Still, I am not sure that such a GPS system as Autograph is the optimal way of tracking drivers. It is expensive and I hope the marketplace will develop other alternatives. Some creative thinking needs to be done here, as "tracking" is a major concern of the insurance companies.

· One of our insurance underwriters, Plymouth Rock Assurance of Massachusetts, which serves three East Coast states, has told me that they are interested in cooperating on a pilot around mileage based insurance. As I noted above, Better World hopes to market auto insurance to its Oregon customers in the not-too-distant future and would be very interested in partnering with an underwriting company that offers the usage-based insurance option.

· HB 2043 is an appropriate incentive for insurance companies to help them cover the transition costs associated with providing a socially beneficial new rating policy. If anything, it is important to hear from the insurance underwriters to know whether the proposed tax credit is sufficient. The potential benefits are great.

If the legislation is adopted, it will be fascinating to see whether this type of policy can break through to become a standard part of the menu of policies offered by a typical property and casualty underwriter. If we can identify a willing underwriter, Better World will promote the program as aggressively as my business partner drives…all right, Budweiser doesn't promote that aggressively, but as aggressively as we can.

Thank you.