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%.

[laotzu]

"No self insurance here"

No. You would have to look in the Arizona Motor Vehicle Statutes. There you will find the following:

28-4135. Motor vehicle financial responsibility requirement; civil penalties
A. A motor vehicle that is operated on a highway in this state shall be covered by one of the following:
1. A motor vehicle or automobile liability policy that provides limits not less than those prescribed in section 28-4009.
2. An alternate method of coverage as provided in section 28-4076.
3. A certificate of self-insurance as prescribed in section 28-4007.

"forms of financial responsibility, more commonly called liability insurance"

Financial responsibility, or liability insurance, doesn't have to be through an insurance company. You only need evidence of financial assets set aside specifically to cover potential losses. Back to the Arizona statutes:

7. "Proof of financial responsibility" means proof of ability to respond in damages for liability on account of accidents occurring after the effective date of the proof and arising out of the ownership, maintenance or use of a motor vehicle, in the amounts required by section 28-4009 or 28-4033.

So....it is not a matter of being forced to 'bet' against the insurance companies. There is another reason, despite your resentment, that you continue to give your business to insurance companies. What is it? Why don't you self-insure?

[discostu]

Wow there are tons of people on FR that don't know when to drop it these days. Why don't I self insure? Because I don't own 25 vehicles.
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.

[laotzu]

"Wow...don't know when to drop it"

Wow...like, this is really upsetting you.

dropped

[discostu]

Only part upsetting me is that you're wrong and yet keep bringing it back up. And you're not the only person playing Don Quixote to my windmill these days. There seems to be a large crowd on FR these days who's motto is "I keep hitting my head on the wall because it feels so good when I stop".

[Xenalyte]

Your opinion, Insurance Man?

[laotzu]

dropped?!!

If you must have the last word, just say so. You have suffered irritation with debate; I am not compelled to inflame it.

Transferring a risk in appreciation of premium dollars is not 'betting'. A brief study of insurance, or looking up the definitions of 'betting' and 'indemnification' in any dictionary would clarify this for most.

Premium is not earned by paying claims. It is earned by accepting risk, regardless of whether hazards become perils.

It is human nature to resent what is forced upon you. Forced or not, it would be wholly irresponsible, & stupid, to not plan for potential catastrophes.

Thank goodness there are people around that allow us to transfer the tremendous burden of those risks off of our shoulders, and onto theirs.

Insuring is not betting.
All rates, premiums, coverages, endorsements, and policy wording is dictated by the state...not the insurance company.

Repeating that 'I'm wrong' does not change these facts.

This is proudly how I make my living, and what brings me into contact with an industry abundant with impressive, intelligent, generous, and honest people. I do not gamble with the well being of my family, or the families of those I insure.

Perhaps you may understand my reluctance in accepting that you have a clearer understanding of my life than I do.

Again; if the back & forth exchange of information is bothersome, say the word. If needed, you can have the last word.

[discostu]

Oh now you're back on the "insurance is betting" thing. I already told you it was a joke, rent a sense of humor. What you're wrong about is the self-insurance thing. What a rant, funny how it always seems to be the people that think the other person is "upset" that get the most upset. Really you need to chill, have a drink on me. I have no malice toward the insurance industry or the people that work in it, and any malice you sensed in my posts is strictly the product of your imagination. I have no problem with a back-and-forth exchange of INFORMATION, but if you're going to log back in three days later and misquote AZ statute I reserve the right to be condescending.

[laotzu]

"I already told you it was a joke, rent a sense of humor"

And a darn funny one at that. I get it.

Insurance is betting....that's a knee slapper. It's a sucker's bet and the house always wins in the end....oh stop it, your killing me!

You weren't wrong; you made a joke. Where does one rent that quality of humor? Do you really write your own material? I'm sure I heard that second one on Johnny Carson.

"if you're going to log back in three days later"

I frequently get called away, and wasn't able to hang on your every word. Not to worry though, your joke is as funny today as the day you told it. Insurance is betting...you crack me up!

"and misquote AZ statute"

Hey!! It was a joke....duh.

"you're wrong about..the self-insurance thing"

Perhaps. Fortunately, there remain a great number of things I don't know....and welcome the opportunity to learn.

I would be very surprised about this one, though. Obviously it isn't totally foreign to them. I am tempted to actually research it; but am reluctant if it will cause you further anxiety. Rest up, and let me know.

[Old Professer]

I doubt that it is a felony; the Interstate Commerce Clause would come into play on appeal.

[discostu]

Hey, the life insurance guy that my mom worked with that told me that joke thought it was funny. And twenty{cough} years later I still think it's funny. I told you Friday it was a joke. Sorry you didn't get it.

Wait a bloody minute, I told you Friday that you shouldn't make blanket statements about self-insurance because the laws vary too much from state to state. You then said, nope you were going to make a blanket statement and specifically included AZ, I quoted (and sourced) from the ADOT website that you were wrong, three days later you mis-apply ASRS laws (without bothering to site), I show how GROTESQUELY wrong you were. And NOW all of a sudden you're welcoming the opportunity to learn. Maybe you should have learned Friday, now you're just a cornered rat finally forced to admit you're full of crap.

Do all the research you want, I actually provided a link to ASRS so it should be easy for you.

[Old Professer]

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.

Totally unsupported by data.

[Old Professer]

A further reading of Az laws seems to allow a private owner to post a cash bond or a bank guaranty of $40,000 to satisfy 28-4076:

28-4076. Alternate methods of proof

If required by this chapter, a person may give proof of financial responsibility by filing one of the following:

1. A certificate of insurance pursuant to section 28-4077 or 28-4078.

2. Certificates of deposit or cash pursuant to section 28-4084.

28-4084. Monies or certificates of deposit as proof; exception

A. The state treasurer may issue a certificate that gives evidence of proof of financial responsibility that the person named in the certificate has deposited with the state treasurer forty thousand dollars in cash or certificates of deposit with a value of forty thousand dollars issued by a financial institution.

B. The state treasurer shall not accept the deposit and issue a certificate for and the director shall not accept the certificate unless the depositor provides evidence that there are no unsatisfied judgments of any kind against the depositor in the county where the depositor resides.

C. The state treasurer shall hold the deposit to satisfy, in accordance with this chapter, an execution on a judgment issued against the person making the deposit for damages, including damages for care and loss of services, because of bodily injury to or death of a person or for damages because of injury to or destruction of property, including the loss of use of the property, resulting from the ownership, maintenance, use or operation of a motor vehicle after the deposit is made.

D. Monies or certificates of deposit deposited pursuant to this section are not subject to attachment or execution unless the attachment or execution arises out of a suit for damages described in subsection C.

E. Deposits of cash or certificates of deposit under this section do not satisfy the financial responsibility requirements prescribed in article 2 of this chapter.

Note that E. refers to article 2 which deals with commercial carriers and foreign-owned vehicles; for more information, this link will take you to the hyper-linked site http://www.azleg.state.az.us/ars/28/title28.htm

[Old Professer]

See post 92.

[discostu]

From my read of 4007 (post 82) I don't think it's available to the general public. It would seem to me that self-insurance is only available to those with fleets (25 cars registered in their name) or those that are already required to demonstrate finiancial responsibility for other reasons. I think the key work in both what I've sited and you've sited is "required", I'm not seeing anything saying a person can self-insure if they are ABLE to, but that under certain circumstances they are required to show they don't really need insurance and since they've shown they don't need it they can self-insure.

Also if you look at section C of 4007 I'm not convinced anybody would actually want to self-insure here.

Thanks for the ping.

[Old Professer]

Basically, 4076 is a bond; if actual damages or losses to another party exceeded $40,000 then the poster of the bond could be held liable from other assets.

The way I read it, 4007 is essentially for those exemptions in article 2.

I'm sure that most people could find a better use for $40,000 than to tie it up with the state.

[discostu]

Between the 25 car thing and the exemptions on article 2 I think self-insurance is only available here if you own a fleet or do some form of chaffeur stuff with your car (like a 1 or 2 car limo-service, probably small time bus tour companies, basically anything where if the business takes off you'll probably have a fleet eventually), I'm still keying on the "required".

And that's just AZ, car insurance laws vary so much from state to state it's crazy. At one point we had to have our cars insured in both AZ and NM and enough coverage to make the bank holding the loan happy, took hours to get it worked out with the insurance company. Then a few years later we wanted to make some changes to the policy and one of the first things the rep noticed was that we weren't actually NM legal. Too crazy by far.

[laotzu]

Thanks for the addtl info.

It would seem odd for the same government that approves which insurors are allowed, to also mandate that everyone provide them business.

But; stranger, & more corrupt, things have happened.

[Sloth]

If a product or service is subsidized, more of it will be consumed.

Driving is a pretty inelastic commodity, though.

[laotzu]

"a cornered rat finally forced to admit you're full of crap"

I don't get it.

I must look into renting that humor thing you spoke of.

Recognizing it is not a guarantee; the ability to self-insure is generally always an option available. Your hesitancy to consider its existance is more indicative of a fond convenience for having a whipping boy in the insurance industry, than in any personal working knowledge of Dept. of Insurance regulations.

The option to blame others is often chosen over personal responsibility. Offering pearls of wisdom like "Their job is to get as much money out of you as possible" provides enough such comfort that most will accept as truth, what is actually an ignorant, inciteful lie. But hey....your not blaming...it's only a joke.

I really, really must look into renting that humor thing you spoke of.