Pay-as-you-drive automobile insurance, a concept permitting motorists to buy coverage on a per-mile basis, is attracting attention as one answer to soaring gasoline prices and increasing traffic gridlock.

With pay-as-you-drive, insurance factors such as driving history, vehicle type and geographic location are incorporated into the per-mile price, which generally ranges between 2 cents and 10 cents. Mileage readings are captured through sensors in cars or authorized odometer readings.

Advocates say that if people could save money by reducing miles driven, instead of paying a lump-sum annual or semiannual premium, they would take fewer trips or be more likely to use other forms of transportation. Studies have estimated the concept could reduce overall driving by around 10 percent.

"It's almost a no-brainer when you look at reducing gasoline use and conserving oil," said Dean Baker, director of the Center for Economic and Policy Research, a Washington, D.C., think tank.

Maryland state Sen. Lisa Gladden (D-Baltimore), who has sponsored pay-as-you-drive legislation, said she tried to show the appeal of the concept by bringing a pound of grapes to a legislative hearing.

"I said, 'If this pound costs a dollar, but I only eat half of them and you still charge me a dollar, is that fair?'" Gladden said. "That's the way we as consumers do business with auto insurance."

New Jersey has never seriously considered a "pay-per-mile" system even though it perennially has the nation's highest average rates. In 2003, the last year for which national averages are available, New Jerseyans paid $1,188 for their auto insurance coverage -- 44 percent above the U.S. average. That same year, state lawmakers enacted a law that partially deregulated the state's auto insurance market, which had a reputation within the industry for excessive red tape.

So far, several major insurers have re-entered the market, including Geico, Progressive and Mercury General. The extra competition has forced several companies to roll back some rates, at least temporarily.

A 2002 Georgia Institute of Technology study found that 27 of 43 states surveyed would be legally permitted to offer pay-as-you-drive insurance, including Alabama, Michigan, Ohio, Oregon and Pennsylvania. In the other states, such as Louisiana and New York, it found that laws would need to be changed. New Jersey was not among the states surveyed.

But the insurance industry largely has been skeptical. Texas in 2001 passed the first law to formally allow insurers to offer pay-as-you-drive insurance, but no companies have responded.

"What insurers are doing is continuing to use systems that they know work," said Rick Gentry, executive director of the Insurance Council of Texas, a trade association of insurers writing business in the state. "If insurers figured out a more efficient, less risky way to offer insurance, they would have jumped on it."

Dick Luedke, a spokesman for State Farm Insurance in Bloomington, Ill., said insurers are concerned that miles driven could be overemphasized at the expense of other factors in determining premium levels.

"We use everything we can to assess the cost (of insurance) so that we can charge premiums that are appropriate," Luedke said.

Pay-as-you-drive advocates say they are confident the industry will warm to the idea as drivers learn more and demand it. They cite several recent signs of progress.

IT WORKS OVERSEAS

Several countries, including England and Japan, have begun offering pay-as-you-drive in recent years.

England's Norwich Union Insurance, which installed small recorders in 5,000 customers' cars to capture mileage data under a 2003 pilot program, subsequently ordered 35,000 more recorders to meet growing demand.

King County, Wash., officials are in negotiations with an insurance company to run a five-year pilot program, said Bill Roach, program manager for transportation demand management in the county, which includes Seattle.

"We're finally beginning to make some inroads," Roach said. "I'm quite optimistic. If you had talked to me a year ago, I would not have been."

Meanwhile, an insurance company recently expressed interest to the Oregon Environmental Council about offering pay-as-you-drive in the state, said Chris Hagerbaumer, the Portland-based group's director of programs and acting executive director. State lawmakers in 2003 passed a tax credit for companies that offer the insurance.

Hagerbaumer would not name the company, but said the establishment of any program is still at least a year away.

In California, the state Office of Administrative Law in July approved regulations that would require auto insurance rates to be based more on miles driven and driving records than on where a driver lives. Advocates said the action eventually could lead to a pay-as-you-drive system.

If the idea is to become widespread, however, advocates acknowledge they will have to assuage privacy concerns about the Global Positioning System devices that are often used to record mileage under pay-as-you-drive.

Some privacy groups fear that if an insurance company keeps records of drivers' whereabouts, the firm could be forced to yield that information if it is subpoenaed in a lawsuit.

"People are wary about the whole Big Brother thing," said Josh Kessler, an analyst for TowerGroup, a financial research and consulting firm in Needham, Mass.

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BY CHUCK McCUTCHEON
NEWHOUSE NEWS SERVICE

Staff writer Joe Donohue contributed to this report. Chuck McCutcheon may be contacted at chuck.mccutcheon@newhouse.com.

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