What is pay-as-you-drive auto insurance?

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.