Make Car Insurance Fairer

Forbes ^ | 03.17.03 | Ian Ayres and Barry Nalebuff

[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%.

[guesswho]

He was right about the self insurance thing.

You owe laotzu an apology.

[discostu]

He wasn't right. And according to his own posts he resurrected this whole thing with a lie just to pull my chain (he first sited 28-4007, which he now says has nothing to do with it, in 81, I made the Quixote comment in regards to that in 84). Even if he had been right about the self-insurance that doesn't change the fact that he's repeatedly lied about what I said and blatantly mischaracterized my posts. I'm not apologizing for being lied to and about.

[laotzu]

It wasn't until I re-read this thread
that I realized you are female.

I apologize, & ask that you please excuse my behavior.

[God is good]

In this regard, auto insurance is comparable to our lovely, "fair" tax system. The people who should pay don't, and the people who should be rewared for making money and keeping better the quality of life in this "free" country, are called evil and have to pay their "fair share."

[God is good]

"Make it voluntary and watch the price plummet."

That's what I tell people and they look at me as if I was crazy. It amazes me how little people in general think about anything. Public "education" taking its toll?

The American auto insurance scam almost seems like a ploy to pull working Americans down more and more and raise up the big daddy government the lazy, ill-willed, greedy, brainless, spineless sheep the socialist fools tend to breed.

Auto insurance? I too should include medical insurance and our so very logical tax system.

[God is good]

I THINK WE HAVE A WINNER!!!

[wasp69]

So, can anyone tell me if I can get self auto insurance in Arizona?

[discostu]

Wow what an antique. According to how I read it you can IF you have a fleet or are otherwise a commercial interest but not otherwise. Eitherway it means sticking a lot of money somewhere you can't touch it and you're probably better off not doing it.

[FITZ]

I have no tickets, no claims, no accidents, yet my insurance premiums rise every year due to "uninsured motorists".

Mine too but it's not just unisured motorists. A lot is now the extreme high cost of many of the cars being driven. It's a bit unfair if someone is driving an older car that might have a blue book value of $2000 and others are driving cars that cost them $40,000 --- I believe liability is the same for both drivers so the cheaper car's driver would only get $2000 max if the other driver was at fault. It makes it very difficult for people forced into low wage jobs to afford insurance.

[PISANO]

You can go 50 years without an accident but pay as much at 65 as you did at 15. (Inflation adjusted) There is a point from which you can go no lower, even if you have NEVER been involved in an accident, unless you minimize the coverage that you have.

[Focault's Pendulum]

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

That is a very uninformed statement.

[Focault's Pendulum]

Most fatalities and DUIs are by uninsured drivers.

Where did that info come from...just curious.

[fightu4it]

I'll go you one better.

When I was stationed in Australia in 1969 I had to buy insurance for my car. A 1954 MG tf. The government in Australia required a minimum coverage policy. The policy was the same regardless of the company selling it and the price charged for the policy was required to be the same where ever you bought it.

You could purchase additional coverage if you desired and those prices were not controlled.

For thirty something years now U.S. insurance companies have been able to thwart any effort to establish that system here.

[laotzu]

According to the state of Arizona:
"Before you can register a vehicle in Arizona, you must show proof of financial responsibility. This can be in the form of a certificate of insurance, a bond, or certificate of deposit or cash in the amount of $40,000."

Any of these methods, save the first(certificate of insurance), could be referred to as 'self-insurance'.

[discostu]

The law hasn't changed, the argument hasn't changed:
http://www.azleg.state.az.us/ars/28/04007.htm

A. A person in whose name more than twenty-five motor vehicles are registered or who is required to comply with the financial responsibility requirements prescribed in article 2 of this chapter may qualify as a self-insurer by obtaining a certificate of self-insurance issued by the director as provided in this section.

B. On the person's application, the director may issue a certificate of self-insurance if the director is satisfied that the person is able and will continue to be able to pay judgments obtained against the person.

C. On not less than five days' notice and after a hearing, the director may cancel a certificate of self-insurance on reasonable grounds. Failure to pay a judgment within thirty days after the judgment becomes final is a reasonable ground for the cancellation of a certificate of self-insurance.

D. A person who is required to comply with the financial responsibility requirements prescribed in article 2 of this chapter may apply for partial self-insurance to cover any portion of the financial responsibility requirements.

Twenty-five vehicles to self insure. PERIOD.

[laotzu]

Quite true, as regards commercial auto only.

That was not the question.

[discostu]

It's the same challenge you failed to live up to months ago:
Show the law that says an individual in AZ can self-insure. Quote it and link it.

[laotzu]

"Quote it and link it."

Go to:
http://www.id.state.az.us/consumerautofaq.html#A_1

[discostu]

Wow you finally did it. Wonder why you couldn't do that months ago. Oh that's right you were being a dork.

OK you're right. Done deal.

[laotzu]

In all fairness, that is a link to the Arizona Department of Insurance; and we all know what lyeing bastards they are.

Besides, what would they know about it?