“It’s so perfect!” Richard Woll, FCAS (Fellow of the Casualty Actuarial Society), at Allstate Research. Why did the Texas Legislature pass the cents-per-mile choice law? Every legislator hears repeatedly from constituents who are angry about auto insurance. Most upset are people who have an accident with an uninsured car. This problem remains despite ongoing initiatives by the Texas Department of Insurance. The percent of uninsured cars on the road, according to insurance industry officials, may be even higher than it was when insurance was made compulsory two decades ago. After seeing little progress in eliminating the related problems of high insurance rates and uninsured cars, the 77th Legislature this year enacted HB 45 - the “Cents-Per-Mile Choice” law. The law was designed to encourage insurance companies to offer their customers an affordable, cost-based alternative to traditional dollars-per-year rates. House Bill 45, introduced by Rep. McClendon, sponsored by Sen. Shapleigh, and signed into law by Governor Perry, allows companies to begin offering mile rates as the way for consumers to exert direct control over insurance cost – buying miles only as needed at cents-per-mile rates - beginning January 1, 2002. Advocates for HB 45 say that this legislation is the first to:  [1] Offer a practical way to reduce the number of uninsured cars in Texas. [2] Challenge the insurance industry's practice of overcharging drivers who drive the fewest miles each year - and are often the least able to afford higher costs. How do companies sell insurance at mile rates? Accidents are random, so to estimate a statistically reliable cost per car year, companies use the average cost experience of a large number of cars in a group defined by car, driver, and household profiles. This cost per car is the basis of the current rate for each rate group. Because the activity that randomly produces accidents is driving cars, the average cost of the group also depends proportionally on the average miles driven by all of the cars during the year. More miles means more claims to pay and more cost to the company. To offer a mile-rate alternative for cars in a rate group, a company only needs to divide the group’s current year rate by the average miles of the thousands of cars the company has assigned to the group. Under the new law, each owner of a car in any company group may choose between the group’s year rate and its mile rate. How do you pay for insurance at a mile rate? Instead of paying for insurance in installments at a year rate, you can choose to buy the same insurance at a mile rate. The number of miles bought is your choice too. A company assigns your car to one of its rate groups by profiling your zip code, car type and use, household drivers, your credit history, and other information about your household they have access to. The choice of continuing to pay at a year rate or buying miles as needed is offered only after the company sets the alternative year- and mile-rates for your group. Say that your company’s going year rate for driving coverage of cars in your profile group is $500, and the average mileage for the group is about 10,000 miles a year.  (Companies get annual miles from periodic Government studies that determine the averages according to driver, car, and household profiles. After the first year, companies will know the total miles driven by those of your group who chose the mile rate alternative the previous year.)  Then the company would give you the choice of its year rate or buying miles at your group’s average cost of 5.0 cents a mile. Miles purchased are added to your car’s odometer reading and printed on a proof of insurance card. You are responsible for watching the mile limit to your car's insurance in the same way you watch your gas gauge. As the limit approaches, you buy more miles to keep the car insured. If you chose to buy 2,500 miles of insurance protection - to be added to your car’s current odometer mileage - it would cost you $125 (= 5.0¢/mi. x 2,500 mi.) plus a nominal expense fee. Before these miles were all driven, you would have to buy more miles to stay legally insured. What are the adverse effects of traditional ways car owners reduce their costs? Traditionally rates are charged per car, not per driver or per car mile. Therefore, the only way to save without cutting coverage, as everyone knows, is to reduce the number of cars the family insures. If a family with two cars sells one and puts all of their driving on the other, they save nearly 50% on their insurance bill. However, this strategy is not needed in higher-income neighborhoods because most families can afford the convenience of owning and insuring a car for every driver. But where used broadly, the strategy has adverse consequences. In low-income areas, many households are forced to save on insurance by drivers sharing cars. This pushes up miles and costs per insured car and with them the insurance rates. The increase in insurance rates forces more drivers to share cars that are insured and creates a spiral of increasing costs and rising insurance rates. But cents-per-mile rates offers an alternative to saving on insurance by insuring fewer cars and driving them more. It lets drivers keep their cars and buy miles of insurance protection like gallons of gasoline, when they want to and in the amounts suited to their needs and budget. Who “saves” when some households are forced to economize on driving? Families driving less when gas prices rise, or responding to economic reverses by doing less driving for shopping or entertainment, all result in less cost and windfall profits for car insurers. The cents-per-mile measure of insurance cost explains why the number of insurance claims historically decreases when unemployment or gas prices rise. Some companies spread their cost savings as “dividend” refunds of a uniform percent (5% to 20%) of the rates to all policyholders, whether or not they have individually been driving less. The car-mile measure of cost also explains why men average more accident involvements than women do: in every driver age group, men simply average more miles of driving. Therefore, companies look to women car owners as a source of extra profits from lower costs that they call “skimming the cream.”  Companies may choose to use these extra profits from lower costs to keep year rates down for those who do more driving. A parked car can be stolen or damaged by hail.  Would insurance for these losses also be sold at cents per mile rates? No, because these are not driving-related losses. The law specifies that the choice of mile rates is “for coverage for losses caused by collision or other driving-related accidents.”  (HB 45, Sec. 2) Cents-per-mile rates apply to liability, uninsured motorist, collision, personal injury protection (PIP), and any other coverage by your policy for driving-related losses. Coverage for non-driving related losses (which are grouped under the term "comprehensive" or “other-than-collision” coverage by insurers), would continue to be paid for at a year rate. What about proof of insurance? The first time you choose to buy insurance at a mile rate, the number of miles purchased is added to your odometer reading. If your odometer reads 60,500 miles when 1,500 miles are bought, the insurance ID card would show "Company X insures car VIN #### to 62,000 miles." The car becomes uninsured at 62,001 miles unless you buy more miles to add to the current 62,000-mile limit. This can be done by a simple phone call to your agent or the company's 24-hour 1-800 number. For an ID CARD to serve as proof of insurance for annual inspection and registration, the law makes the exception that 1,000 miles is the minimum purchase amount, equivalent to the 30 day minimum buy at year rates for inspection and registration purposes.  Annual-rate insurance is routinely sold for special purposes by the day or week. Who is responsible for checking odometers? Car owners are responsible for watching the mile limit for the vehicle's insurance, the same way they watch the fuel gauge. A transparent windshield sticker with company logo - like the service period stickers of garages and dealers - would remind the car owner of the mile and date limits on protection purchased. In order to get the policy renewed, an annual reading for the insurance company would be done at a service center, by the agent, or at garages licensed to do state inspections. The annual reading is not for billing purposes—miles of insurance are bought and paid for in advance.  Instead the reading serves two purposes: [1] To help in detecting and preventing odometer fraud. [2] To record each car’s mileage in the past year. (Companies now base their year rates on the claim cost per car-year in each rate group.  Dividing this average dollar cost by the group’s average mileage gives the cents-per-mile cost basis of the mile rate.  The company’s past ($ cost per car year)/(miles per car year)= cents-per-mile cost.) What are the incentives for owners to monitor the odometer limit to insurance? Most people want to stay insured - in case of an accident or a traffic stop. Car owners who happen to exceed their pre-purchased mileage limits would go to their insurers to buy more miles of coverage, including the miles for which they had a lapse in protection. After experiencing such a lapse in protection, most car owners would more carefully watch mile limits. Has CENTS-PER-MILE choice been used before? Until now, insurers have only offered the mile-rate choice to commercial fleet owners. Forms approved by the TDI specify the rate basis for fleets as either “per vehicle” or “per mile”. How do I access the CENTS-PER-MILE option? The new law does not require insurance companies to offer customers the option. Texans should immediately demand that their companies make this alternative available. Call your agent today and request a cents-per-mile quote along with your dollar-per-year quote at renewal time.