Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Make Car Insurance Fairer
Forbes ^ | 03.17.03 | Ian Ayres and Barry Nalebuff

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%.


TOPICS: Business/Economy; Culture/Society; Free Republic; Miscellaneous
KEYWORDS:
Navigation: use the links below to view more comments.
first 1-2021-4041-6061-80 ... 161-180 next last

1 posted on 03/05/2003 8:12:53 PM PST by wallcrawlr
[ Post Reply | Private Reply | View Replies]

To: wallcrawlr
Make it voluntary and watch the price plummet.
2 posted on 03/05/2003 8:15:23 PM PST by Jim Noble
[ Post Reply | Private Reply | To 1 | View Replies]

To: wallcrawlr
Since when does the number of miles driven have any correlation to the number and type of accidents occurring per mile traveled by driver?

The facts are exactly the opposite. Drivers who don't drive many miles have a greater number of accidents per mile traveled because they don't have the experience of driving in all types of weather and in all road conditions.

This is just another attempt by the insurance companies to drive up the cost of insurance. And unfortunately, the public can be seduced by a program that promises to "lower costs and make it fairer" while the hidden agenda of being able to monitor your movements via GPS is overlooked.

This is a program that should be squashed!
3 posted on 03/05/2003 8:18:44 PM PST by rollin
[ Post Reply | Private Reply | To 1 | View Replies]

To: wallcrawlr
Actually, something I'd prefer is a discount for those who park their cars in a garage....since garage parked cars are NOT stolen, broken into, had CD players, etc. ripped off.....at home at least, where lots of the problems occur (on neighborhood streets).

Someone can drive A LOT of miles and be a better insurance risk, than someone who simply drives to the store everyday, but is a looney or crazy driver. Think teenage kid vs. salesman.

IMHO this is another attempt by the envirowhacko's to keep people from driving.
4 posted on 03/05/2003 8:22:10 PM PST by goodnesswins (Thank the Military for your freedom and security....and thank a Rich person for jobs.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: wallcrawlr
Anyone who says that women get a raw deal on auto insurance is a FU*KING MORON!!! I know women who have multiple vehicles mutiple accidents and tickets that are unmarried who are the same age as me who pay less than HALF of what I have to pay, that is whats unfair about insurance. If blacks had to pay twice as much as whites there would be a national uproar and a supreme court case.
5 posted on 03/05/2003 8:24:13 PM PST by Husker24
[ Post Reply | Private Reply | To 1 | View Replies]

To: wallcrawlr
I'm surprised to see an idiotic article like this in a respectable publication like Forbes.

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.

6 posted on 03/05/2003 8:25:50 PM PST by Alberta's Child
[ Post Reply | Private Reply | To 1 | View Replies]

To: wallcrawlr
Driving without insurance is a felony in Idaho. Yes, you lose your right to vote and your right to own firearms. This opens the door for insurance companies to charge (extort) exorbitant fees.
I realize driving without insurance is a serious matter, but a felony?.
7 posted on 03/05/2003 8:33:46 PM PST by reloader
[ Post Reply | Private Reply | To 1 | View Replies]

To: Alberta's Child
"The cost of tracking the milage would be enormous."

USAA Auto insurance simply asks the customer how many miles per year. This is done on a yearly basis.

8 posted on 03/05/2003 8:35:48 PM PST by Ben Ficklin
[ Post Reply | Private Reply | To 6 | View Replies]

To: wallcrawlr
Someone explain to me the following:

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?

9 posted on 03/05/2003 8:38:42 PM PST by sarasmom (SAC Trained killer.I am more comfortable with nuclear weaponry than Jimmy Carter mentality.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Ben Ficklin
I know. But once you get above a certain point (10,000 miles per year, I think) the rates don't change. USAA is more interested in how the vehicle is used than in how much it is used. Someone who takes a bus to work most days but puts 12,000 miles per year on the vehicle pays a lot less than someone who drives five miles each way to work and puts only 5,000 miles on the car.
10 posted on 03/05/2003 8:42:39 PM PST by Alberta's Child
[ Post Reply | Private Reply | To 8 | View Replies]

To: Jim Noble
Make it voluntary and watch the price plummet.

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.

11 posted on 03/05/2003 8:42:59 PM PST by hopespringseternal
[ Post Reply | Private Reply | To 2 | View Replies]

To: reloader
Driving without insurance is a felony in Idaho.

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.

12 posted on 03/05/2003 8:47:32 PM PST by steve86 (O.J. did it.)
[ Post Reply | Private Reply | To 7 | View Replies]

To: wallcrawlr
Your last two posts makes me think Forbs is turning socialist.
13 posted on 03/05/2003 8:51:16 PM PST by cksharks
[ Post Reply | Private Reply | To 1 | View Replies]

To: rollin
Not only that, but highway miles are much safer than urban miles. All the accidents I've suffered have been in urban or suburban areas (the last one was on Independence Ave. in DC when a clown in a Caddilac blew through a Stop sign).
14 posted on 03/05/2003 8:53:40 PM PST by expatpat
[ Post Reply | Private Reply | To 3 | View Replies]

To: wallcrawlr
Actually, we should INSURE THE PERSON, NOT the CAR!
15 posted on 03/05/2003 8:54:51 PM PST by goodnesswins (Thank the Military for your freedom and security....and thank a Rich person for jobs.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Jim Noble
No fault Insurance allows everybody to buy as much or as little personal coverage as they desire and actually reduces claims.
16 posted on 03/05/2003 8:57:11 PM PST by Libertarianize the GOP (Ideas have consequences)
[ Post Reply | Private Reply | To 2 | View Replies]

To: wallcrawlr
The best way to lower insurance costs is to get rid of no-fault insurance. Good drivers don't pay for the bad drivers.

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.....

17 posted on 03/05/2003 8:57:18 PM PST by JZoback (Don't have such an open mind, your brain falls out)
[ Post Reply | Private Reply | To 1 | View Replies]

To: rollin
The GPS angle leapt out at me, too. The insurers already have a database of the worst intersections, accident-wise. Your rate could be hiked just because you drove through one. Then there are neighborhoods with high rates of theft and vandalism, hope you don't live or work near one. Are you starting to feel the eyes of BB on the back of your neck yet?

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.

18 posted on 03/05/2003 8:58:26 PM PST by ZOOKER
[ Post Reply | Private Reply | To 3 | View Replies]

To: Libertarianize the GOP
No fault Insurance allows everybody to buy as much or as little personal coverage as they desire and actually reduces claims.

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.

19 posted on 03/05/2003 9:03:34 PM PST by JZoback (Don't have such an open mind, your brain falls out)
[ Post Reply | Private Reply | To 16 | View Replies]

To: Alberta's Child
I have no knowledge of how they charge for commuting to/from work. Until recently I had one vehicle @ 20,000 miles per year used in my work and a second vehicle @ 3000 miles per year for pleasure. Of course there was a difference, especially with the second car discount.

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.

20 posted on 03/05/2003 9:03:49 PM PST by Ben Ficklin
[ Post Reply | Private Reply | To 10 | View Replies]


Navigation: use the links below to view more comments.
first 1-2021-4041-6061-80 ... 161-180 next last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson