A NEW study's found basing the cost of car insurance on how far you drive can save people money and help the environment.

An analysis by the Institute of Actuaries of Australia has found Australians could save $3.2 billion dollars a year - if the cost of maintaining a vehicle was more closely linked to the number of kilometres driven.

One way of doing this is through pay-as-you-drive insurance - where the cost of the policy's based on how much the car's used as well as the driver's age, gender, location and vehicle type.

The Institute says Australians drive too much, because many of the costs of driving aren't paid directly by the driver or owner.

It estimates Australians would drive seven per cent fewer kilometres if they switched to PAYD, and with fewer cars on the road there'd be fewer accidents, less congestion, road maintenance and pollution.

The Institute did not say what bearing its proposal would have on rurla car drivers who are forced to use their cars more than city dwellers.  

The Bureau of Statistics says the average motorist drives about 14,600 kilometres annually.