Montemayor's approval enables insurers to voluntarily establish pilot projects to test mile-based auto insurance rating as a way for some low-mileage drivers to reduce their auto insurance premiums. The usage-based rating option will expire Sept. 1, 2005, unless extended by law.

"Anything that may lower auto insurance rates as well as make a dent in the number of uninsured drivers on the road is good for Texans," says Montemayor. "All we need now is for insurance companies to grab this ball and run with it."

Until recently the insurance industry has been rather cool to mileage-based pricing. Established insurers have been reluctant to adopt it because it would lead to higher rates for half of its customers, and that half would be angrier than the other half would be pleased. Pay-per-mile insurance makes the most sense to a company that is trying to grow and to attract more women customers.

Another stumbling block is that some states make it very difficult for insurers to provide this product. Patrick Butler has been working for some 20 years to get the law changed to bring per-mile insurance to the marketplace. With the support of the National Organization for Women, he has drafted model legislation to allow firms to offer per-mile insurance.

In the United Kingdom, Norwich Union, a major auto insurer, has already rolled out a similar plan and uses a 'black box' GPS device that records the mileage of the car. This information is then sent to Norwich Union via a cellular phone network. Similar to how cell phone charges are calculated, insurance premiums will be based not only on the miles driven but also when they were driven. Some of the features of this program include:

• Personalized per mile rate based on the time of day driven
• The first 100 off peak miles (6am and 11pm) each month are free.
• Premiums are billed monthly
• Once the GPS is installed (there is an initial fee, but it is thought to be less than the annual savings of the plans) it has a built in locator, in case the car is stolen.

Early indications suggest that customers who drive less than the norm are saving, on average, 25%.

How it works

Under the Texas rules, a driver could buy auto insurance good for, let's say, 3,000 miles based on odometer readings or some other method of verification. The coverage would expire when a car exceeded the specified mileage. However, the policyholder could buy additional mileage.

According to the TDI, if a policyholder has mileage left at the end of a policy period, the insurer could then either refund the policyholder's premiums or give the individual a credit toward his or her renewal policy.

The rules also:

• Allow insurers to require a customer to use the same rating plan — either time-based or mile-based — for all autos covered by a policy.
• Require drivers with mileage-based policies to have at least 1,000 miles of coverage to satisfy state minimum liability insurance requirements for inspection, titling, registration of their vehicles, or to renew their drivers' licenses.
• Allow insurers to check, at any time, a policyholder's odometer or use some other method to monitor mileage.

Progressive's mile-based product test

Progressive County Mutual Insurance Co. pioneered usage-based auto insurance in 1998 when it rolled out "Autograph," its test program in Houston that used cellular technology and the Global Positioning System (GPS) to calculate mile-based auto insurance rates. In August 1999, the insurer expanded the test to include the entire state of Texas.

Policies sold in Texas required the use of an aftermarket-electronics vendor for installation of the hardware used to record mileage. Collection of the data was performed by another party, who then passed the data onto Progressive for billing.

Consumers liked the product, Progressive says, because it saved them money. Houston consumers who signed up for usage-based auto insurance saved an average of 25 percent vs. what they were previously paying.

Despite happy consumers, Progressive discontinued selling new usage-based auto insurance policies in April 2000, although it continued servicing existing policyholders. Progressive suspended calculating usage-based rates for all remaining Autograph customers on July 15, 2001, because "the costs involved were prohibitive based on the small number of policyholders," says Progressive spokesperson Courtney Neville.

Progressive supported the new rules in Texas and says it remains committed to mile-based auto insurance. According to the Progressive's statement on usage-based auto insurance: "We have a vision of how technology can be used and are working with others so we can again be the first to offer usage-based insurance this time to consumers throughout the country." Neville says she is not at liberty to discuss any further details.