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%.

[Poohbah]

I'd just legalize shooting an uninsured motorist at the accident scene as a variant of the he needed killin' defense.

[ContentiousObjector]

the problem with black board economics is they can't acount for the douche bag factor.

When a certain industry is dominated by the clinton of the earth the rules of capitalism don't apply.

Insurance has become extortion because they can get away with it.
For example, medical malpractise premiums have continued to go up, even in states that have passed tort reform.

The 'legitimate' Insurance industry and not paying the mafia to firebomb your office have basically become the same thing.

[Libertarianize the GOP]

The no fault insurance I referred to pays only the policyholders damages and each motorists that wants any coverage must buy it for them selves. If you don't buy insurance you can't recover any damages.

[laotzu]

"another attempt by the insurance companies to drive up the cost of insurance"

Insurance companies do not set the rates or premiums for private passenger auto. The state does.

The state dictates the rate charged, the premium collected, the endorsements attached, the coverages provided, and the exact wording of each & every page.

A big convenience of this, for the government, is that their stupid decisions can be blamed on the insurance companies.

Much as you have done here. Your government counts on, and thanks you.

[laotzu]

"opens the door for insurance companies to charge (extort) exorbitant fees"

The state dictates the "fees" charged, not the insurance companies.

[discostu]

Gee every insurance company I've delt with spends a fair amount of time figuring out my average daily drive (twice the distance form home to work plus some fudge) and adjusts the rates accordingly. My rates have also gone down as I've moved passed the "speeding youth" phase, and gone longer without a ticket. Maybe the writer needs a better insurance company.

[discostu]

Actually according to numerous insurance underwriter studies done over the last few decades the average driver avoids an accident about once a mile. So some one that drives 20 miles a day is twice as likely to get in an accident as some one that drives 10 miles a day.

As for driver experience, that's another scale entirely.

[ArrogantBustard]

IMHO this is another attempt by the envirowhacko's to keep people from driving.

From the article:

if the per-mile fee reflected the incremental risk, Berkeley professor Aaron Edlin calculates that driving would be cut back by 9%

Agenda revealed.

[discostu]

Cheap cars, and waiver clauses specifically forbidding the kid to drive the more expensive family vehicles.

[Protagoras]

In January 2002 Texas became the first state to explicitly permit per-mile insurance.

How sad is it that "free" people need permission from rulers to offer goods and services to customers.

[Protagoras]

This will be an infringement on freedom and should be strongly defended against.

I assume you mean if it is made mandatory by government. No freedom is lost if it is done on a voluntary basis between consenting parties.

[Protagoras]

Actually, we should INSURE THE PERSON, NOT the CAR!

Some types do, some do not. Collision insurance must of necessity be tied to the cost of repair or replacement of the vehicle.

[justshutupandtakeit]

My cars are not new and my sons are listed as the principle drivers of the oldest/cheapest. But I still pay 4Gs. The real cost is not the cars but the liability to others.

[Joe Hadenuf]

A WARNING TO EVERYONE THAT MAY NOT KNOW.......Your insurance company is not their to help you. They are there to limit their liability. They are there to take your money, not pay settlements. They are there to make money not spend money.

Many already know this. But many don't. Watch what you say to your insurance company, as they will use anything possible to avoid covering something, or settling......

[discostu]

Well you have sonS plural. That means that not only are you paying the youth tax but also the penis tax, and more than once to boot. If either one has gotten into an accident or had a ticket it's just game over. My brother-in-law's record got so hosed with multiple accidents and tickets that his monthly insurance payment was actually higher than his car payment... the good news is it did teach him to be lighter of foot and quicker of eye. Auto insurance companies are mean, and they were mean even before the age of mandatory insurance. But there's a reason why auto insurance is a profitable business and health insurance isn't, HMO's aren't allowed to do half the stuff auto insurance companies are, and they're all going under.

Check in your paper work and see if your sons are secondary drivers on the other cars, the fewer cars you let your kids drive the cheaper your rates will be. The youth and penis taxes are a function both of the number of sons and the number of vehicles, that's one trick we did was take me off as secondary driver on my wife's car until I got older and a good record, saved us some change.

[justshutupandtakeit]

If the boys were only allowed to drive one of the cars that could make things very complicated. So I jsuati. Fortunately I am wildly wealthy LoL. Oh, yeah...

[discostu]

Good piece of advice. If I may add:
Always tell your insurance company when they're supposed to lower your rate.

Never tell your insurance company when they should raise your rates.

Your insurance company probably gave you a rather dense booklet describing conditions when they'll raise your rates and when they'll lower them. This book is your friend.
Like with mine if you get a ticket your rates go up (duh), but the ticket is "off your record" in two years. So the last time I got a ticket I didn't tell them about it (no rule that says I have to so I didn't), took 6 months for the police paperwork to float through the beauracracy and for them to finally raise my rates. 731 days after I got that ticket I was calling the company reminding them that the ticket was no longer on my record. End result was that instead of having my rates spiked for 2 years it was only 18 months.

Do that for everything. Somebody in your house turned 25 (standard break point for the youth tax), call the insurance company. Married? Call the insurance company. Realized that X person isn't going to drive a certain car, get them yanked from that car's list. Shorter distance to work, moved to a better neighborhood. But don't tell them anything they don't want to hear, if something happens to your car but you decide to pay for it yourself, don't tell them. Longer distance to work, don't tell them. Obviously you don't want to commit fraud, but everything short of fraud is fair game.

Also review your deductables, and make sure they actually think your car is what it is. Cars with better crash survival ratings generally get lower rates, often there's added deductions for airbags, ABS and passenger side mounted mirrors. Look at that paper work and make sure every safety feature your car has is listed. It might only be $20 a year, but 20 of those features is $400 bucks.

[Leatherneck_MT]

Amen

Do away with state and/or federally mandated car insurance.