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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%.
The whole "women drive less" angle is bizarre; most insurers already consider gender along with miles-to-work, use of the car (pleasure, farm, commute), age, and marital status in developing rates.
Using miles driven per year does make sense, and it can take into account the suspicions some on this thread have voiced that infrequent drivers aren't as skilled, in the rare instance that those drivers are unsafe but have had no accidents (which would already increase their rates). Still, even given that theory, the additional driving skill from 40k miles a year vs. 5k miles per year is highly unlikely to compensate for 8x the exposure to collisions.
As for the cost of capturing the mileage data, the insured would simply give that information. Of course, they could lie, but if they lied too egregiously that could nullify the policy and their insurer could deny any claims.
In any case, it is unlikely that such a rating factor would be very large, given the application of other criteria like # of accidents, sex, class factor, etc.
It is curious to me how some folks who are otherwise free market supporters turn on insurance companies, and somehow think it's all price-fixing and whatnot. Let me tell ya, folks, it ain't, though sometimes (okay, a lot) state regulators stick their fat noses into things and screw the consumer by refusing to let the market set the price for insurance.
What???????? Does anyone believe this drivel? (Circle the block a few more times, Honey, we've only driven 18,000 miles this year and I want to get my money's worth!)
Um, yes, it's basic economics. If a product or service is subsidized, more of it will be consumed.
I will disagree with Forbes on their GPS tracking suggestion. The privacy implications are enormous, and I bet it would take the feds about 15 seconds to demand access to the database.
Well, I'll agree if it's an all-you-can-eat buffet or unlimited internet access :-) When will they charge for chocolate or maid service like this?
It is de facto voluntary in Memphis TN where if you have insurance you are in the minority.
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If basic insurance was taken care of at the pump, then those who drive illegally are paying their share. More protection than the bare minimum, would be bought from the insurance companies.
There could even be a rebate program, for those who are heavily covered, and have an umblemished record.
I thought this was one of the dumber posts of the year until I got to this...
It all makes sense now, moron academics missing the heart of the matter and using fuzzy logic to promote stealth socialism.
Even mediocre minds are intuitively aware that below a certain number of miles driven, drivers are more dangerous than higher mileage drivers.
Exposure is a complex tapestry and reducing it to moronic yardsticks always fails in the real world.
The usual suspects ("progressives" and the other leeches) would suddenly be driving "just" 2000 miles a year. They feel entitled to cheat and are very good at it, from collecting welfare to staging "accidents" to voting several times.
Dumb dumb dumb idea...
Now there's an idea that makes total sense!
I would no longer have to pay extra to cover uninsured parasites.
And watch the millions of uninsured drivers in California plummet if this is adopted.
Yes, uninsured drivers are generally a felony waiting to happen, and a burden to the rest of us. Most fatalities and DUIs are by uninsured drivers.
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