Basing the cost of car insurance on how far you drive can save people money and help the environment, a study says.
An analysis by the Institute of Actuaries of Australia found there was a potential saving of $3.2 billion per year if the cost of maintaining a vehicle was more closely linked to the number of kilometres driven.
One way of doing this was through pay-as-you-drive (PAYD) insurance, where the cost of the policy was based not only on the usual factors - driver age, gender, location and vehicle type - but also on how much the car was used.
The only provider of PAYD car insurance in Australia is Real Insurance, which has been in the market for about 12 months and sells insurance in 5000-kilometre blocks.
Real Insurance chief executive Roger Grobler said more than half of policy holders purchased the minimum 5000-kilometre option.
"If you're not using your car, you can't be involved in an accident," Mr Grobler said on Friday.
"The more you drive, the more the probabilities are of you being involved in an accident and the more your insurance should cost.
"Traditional insurance just doesn't work that way."
The Institute of Actuaries of Australia said the $3.2 billion annual saving - which equated to about $304 per vehicle - did not only flow to motorists in the form of lower insurance costs.
Cities and governments also benefited as fewer cars on the road meant fewer accidents, less congestion and reduced demand for road maintenance, as well as cleaner air through less pollution.
The findings were presented at the institute's biennial convention in April this year.
"Australians drive too much because much of the costs of driving are not paid directly by the driver or owner," the institute's Colin Priest said in a presentation at the convention.
"We estimate Australians will drive seven per cent fewer kilometres if Australia switched to PAYD."
Mr Grobler said a very small reduction in the extent to which people used their cars would have a "massive impact both for individuals and for society".
A financial analyst at Canstar Cannex, Joshua Zenas, said those with PAYD insurance had to keep track of how many kilometres they were logging.
"You need to be exactly aware of where you stand and how many kilometres you are left with," Mr Zenas said from Brisbane on Friday.
"That extra burden is there on a driver."
Mr Zenas said those who were not heavy drivers could potentially benefit financially from the PAYD method.
"There is a substantial level of savings based on the type of driving you do," Mr Zenas said.
Some PAYD providers overseas used annual odometer checks or installed a device in cars to keep track of driving distance, but Mr Grobler said Real Insurance did none of these things.
"It's based on a trust principle, there's no monitoring," Mr Grobler said.
Mr Grobler said PAYD insurance was available in the US, Canada, Japan, South Africa, India and parts of Europe.
The average motorist drives about 14,600 kilometres annually, according to figures from the Australian Bureau of Statistics.
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