State Farm to offer mileage-based insurance discounts

The less you drive, the less likely you are to get into car accidents--at least that's how insurance companies look at it. To better align drivers' automobile insurance rates with risk, State Farm is offering its California customers discounts based on their odometer readings.

The insurance giant created Drive Safe & Save (DSS), a new voluntary program for California customers that adjusts future policy rates based on the previous six months of driving. Prior to the program, the insurance company rated drivers as either a low- or high-mileage driver, with the cutoff point at 7,500 miles per year. That's a stiff inflection point given that the typical California driver travels 12,000 miles annually.

Under the new program that begins February 28, 2011, drivers will fall into one of 39 mileage segments, with discounts starting at 19,000 miles. Drivers can expect to see discounts of 1 to 2 percent for every 500 miles less they drive, with ultralow-mileage drivers (around 2,000 miles annually) offered the biggest discount of 45 percent, which would be useful for retirees and policies on second or third vehicles.

The average auto insurance policy in California is $750 annually, and State Farm predicts that the typical policyholder will save 6 percent. Jumpstarting the savings, State Farm is offering its customers an automatic 5 percent discount for enrolling in the program. Of course, if you underestimate your mileage or travel more than you expected in the first six months, you're putting yourself at risk for a future policy increase. On the upside, the policy will adjust every six months, so you'll have an opportunity to lower your rate by driving less.

The program is similar to GMAC's "pay as you go" program, and is an offshoot of the pilot program that State Farm started with GM OnStar customers in Ohio in August 2009. But the key difference is that the DSS program is open to all State Farm customers--not just those who subscribe to OnStar. It's still good news for GM. In an effort to boost adoption, the carmaker has been working with insurance agencies to persuade them to offer OnStar subscribers discounts. The company says that OnStar subscribers tend to be safer drivers, and its technology saves carriers money by reducing first responders' time to accidents.

The new discount could persuade more GM customers--at least in California--to keep OnStar after the free trial period ends, which 50-60 percent of the customers do. And if an OnStar subscriber chooses to enroll in the DSS program, the service will automatically send the vehicle diagnostic report to State Farm every six months. The rest of the drivers will be using the honor system.