Skip to comments.Make Car Insurance Fairer
Posted on 03/05/2003 8:12:53 PM PST by wallcrawlr
Wouldn't it be a great idea if the oil companies offered all-you-can-drive gasoline? For one fixed price, you could drive as much as you wanted. Of course, this is ludicrous. It would be massively unfair. It would create terrible incentives. Yet this is how auto insurance is sold. Some insurers offer a 15% discount if you drive less than 7,500 miles a year. But beyond this distance the price is fixed. People who drive 10,000 or 100,000 miles pay exactly the same premium.
Econ 101 says that when something is free, people consume too much. In this case, all-you-can-drive insurance encourages people to drive more than they otherwise would if they had to pay the full cost of each mile. The heavy drivers don't bear the total costs related to their actions--hospital bills, body shop bills, highway congestion.
Low-mileage drivers (e.g., women, who drive half as much as men) get a raw deal. Fixed-price insurance hurts Detroit, too. More people would choose to have second and third cars--maybe a ragtop for weekends?--if the extra insurance weren't so expensive.
So what should be done? Simple. Charge drivers for insurance on a per-mile basis. That does not mean higher average insurance rates. It does mean that the low-mileage drivers would stop subsidizing the high-mileage drivers. If the per-mile fee reflected the incremental risk, Berkeley professor Aaron Edlin calculates that driving would be cut back by 9%, with an insurance savings of $8 billion a year and an additional $9 billion savings in reduced congestion. Not to mention the environmental benefits of reduced fuel consumption.
Proposals for implementing usage-sensitive rates go way back. In 1963 Nobel Prize-winning economist William Vickrey suggested that insurance be included in the purchase of tires. Anticipating the objection that this might lead people to drive on bald tires, Vickrey said drivers should get credit for the remaining tread when they turn in a tire.
Andrew Tobias proposed a variation on this scheme in which insurance would be included in the price of gasoline. That would have the added benefit of solving the problem of uninsured motorists (roughly 28% of California drivers). As Tobias points out, you can drive a car without insurance, but you can't drive it without gasoline.
In Vickrey's time, turning back odometers was, perhaps, too easy. With digital electronics, rolling back the odometer is much harder. It is also illegal. Odometer readings are good enough for car leasing--why not for car insurance?
Alternatively, an insurer could monitor distances driven using the Global Positioning System. As this magazine noted earlier (Nov. 27, 2000), Progressive Corp. had a pilot insurance program using this technology.
GPS could slice the risk equation more finely. Highway mileage could be given a discount, and nighttime driving could be charged a premium. Speeding could also lead to higher premiums. To put a positive spin on it: You safe drivers would get the discounts you deserve.
Why has the insurance industry been so cool to mileage-based pricing? An established insurer might be 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 January 2002 Texas became the first state to explicitly permit per-mile insurance. There is mileage-based insurance legislation pending in both Oregon and Georgia.
In the U.K., Norwich Union, a major auto insurer, has already rolled out a similar plan. Early indications suggest that customers who drive less than the norm are saving, on average, 25%.
Why has the insurance industry been so cool to mileage-based pricing?
For the same reason that car rental companies started offering unlimited mileage on their rentals. The cost of tracking the mileage and assessing variable rates would be enormous. And when all is said and done they'll find that the people who drive the fewest miles are actually the highest risks.
The best driver I've ever met is a salesman who puts about 30,000 miles per year on his car, almost all of it in the worst region in the country for drivers -- the New York metropolitan area. He hasn't had an accident in years, but this kind of scheme would cost him a fortune.
USAA Auto insurance simply asks the customer how many miles per year. This is done on a yearly basis.
Florida is a "no-fault insurance state.
You must have PIP and Liability to legally drive your car.
It is stongly encouraged that one gets uninsured motorist coverage.
I have no tickets, no claims, no accidents, yet my insurance premiums rise every year due to "uninsured motorists".
Why should I continue to pay for PIP and liability insurance?
Exactly. It is the cost of covering the bad drivers that drives the cost up for everyone.
And yes, it is the people who drive the least who drive the worst. Long haul truckers can handle much more dangerous and less nimble vehicles for millions of miles without an accident, while half the econoboxes on the road have bashed fenders from hitting stationary objects.
Are you sure about that? I remember reading that auto insurance fraud is a felony in Idaho and some other states but driving without insurance?
If you do have a reference please post.
Insurance per mile is a bogus way to increase your premiums... sort of like your federal taxes....the more you make the more you pay.
Insurance set up like that will always increase.....just like taxes.....
The author also throws out some figures you are supposed to accept on faith --- like the one about men driving more than women. My wife wears out cars at twice my rate, and I don't think our situation is particularly unique. In our soccer-mom phase, she frequently spent most of her day behind the wheel, while I sat at a desk all day.
How does no fault reduce claims? I would think no fault would increase claims since nobody is at fault
Inquiring minds want to know
No fault means insurance companies split the risk. No fault covers their butts, not the insurers.
On the other hand, where you drive is significant. The difference in rates for Dallas County, TX and a west Texas county are sizable. And the difference between Texas, where they sell County Mutual policies thanks to the legislature, and Arkansas, where it is a casulty policy, is also significant.
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