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Pay-As-You-Drive Car Insurance
The new issue of Democracy: A Journal of Ideas (registration, but easy and free) is very interesting. Here is one proposal, from Jason Bordoff:
Drivers who are similar in all respects—age, gender, driving record—pay roughly the same premiums whether they drive 5,000 or 50,000 miles per year, even though the likelihood of a collision increases with each mile. This “all-you-can-drive” pricing scheme imposes significant costs on society: more traffic accidents, congestion, air pollution, greenhouse gas emissions, and dependence on oil.
...the effect of PAYD on miles traveled and gasoline consumption would be significant: a 6.5 percent reduction under conservative estimates, and others suggest the reduction could be as high as 10 percent. To put that in perspective, it would take an 81-cent-per-gallon increase in the gas tax to achieve a 6.5 percent reduction in miles driven.
Monitoring costs seem workable, at least in principle with computerized odometers, so why don't companies do this?
Posted by Tyler Cowen on March 28, 2008 at 04:03 AM in Economics | Permalink
Comments
Why not just jack up the gas tax? I feel like I've said this before.
Posted by: Paul Gowder at Mar 28, 2008 4:13:41 AM
Aren't insurers already doing this? I know that my Dad in Germany has a car insurance which covers damages only if he drives less than 15000 km/year although I am not sure how they check this.
Posted by: Chris at Mar 28, 2008 4:32:45 AM
Companies do, see www.hollard.co.za
A South African company has exactly this product.
Posted by: Rory Mackay at Mar 28, 2008 4:52:29 AM
I'm insured in the U.S. and also get a discount for driving less than 15,000 miles per year. As with the discounts for being a non-smoker or being female, they don't demand proof, although I imagine they would look more closely if I were to make a large claim.
Posted by: David Wright at Mar 28, 2008 5:10:34 AM
This is common in Europe. Annual driving distance, checked if you have an accident, in which case your insurance payout is limited if your odometer is more than it should be. I doubt if it has any significant impact on the length driven, unless you happen to be close to the limit in both time and distance.
Posted by: Espen at Mar 28, 2008 5:11:14 AM
UK company also does this, with GPS to monitor.
http://www.norwichunion.com/pay-as-you-drive/
Posted by: at Mar 28, 2008 5:15:45 AM
Andrew Tobias proposed this years ago. And he proposed collecting it at the pump with each gallon sold. This would have the effect of gas guzzlers paying higher insurance rates than small cars. I'm not sure that's so inequitable and it would be much easier than a parallel system to collect from odometer readings.
Posted by: Hal Miller at Mar 28, 2008 5:16:47 AM
Could very easily be structured around one's mobile phone rather than the car--quick text of current location (confirmed by GPS?), model of car, etc. would register the driver for the trip at hand and for any vehicle in which the driver wishes to make that trip.
Posted by: J.Lo at Mar 28, 2008 5:33:14 AM
It is not very common among drivers yet, but I can tell you insurance companies here in Italy do offer contracts in the form of PAYD schemes.
An example from England: http://www.norwichunion.com/pay-as-you-drive/index.htm
Posted by: Lamiadestra at Mar 28, 2008 5:51:23 AM
All-State asks how much driving you do on an average week and what the purpose of it is. I don't know if this ends up in the premium's or not, but I don't know why they would ask it if they didn't consider it in someway.
Posted by: Justin Ross at Mar 28, 2008 7:33:55 AM
State Farm asks how long my typical round trip commute to work is. I know they put that into their premium.
Posted by: mike at Mar 28, 2008 7:56:47 AM
I'm in the auto insurance in the U.S. It is done in the U.S. -
Progersive has two patents on the technology and is testing it now in
Wisconsin(?). Americans typically are adverse to having thier insurance
company track them.
Posted by: Dave at Mar 28, 2008 8:09:32 AM
Are we really sure that an 81-cent increase in the gas tax only decreases miles driven by 6.5%? I wonder if the studies estimating that mix cause and effect, since the price of gas is higher when people are driving more in the summer.
In the aftermath of the price shock of Hurricane Katrina, when the price of gas ever so briefly spiked above $4, the roads in Northern Virginia were Empty with a capital E. It seemed like discretionary driving disappeared. Driving on 66 with my Prius was never more pleasurable.
Posted by: Ted at Mar 28, 2008 8:20:49 AM
But the sheer number of miles driven is a poor measure. What matters at least as much is the time, location, and types of roads. Somebody who puts in lots of miles on uncrowded rural interstates during daylight hours in snow-free regions is a much better risk than somebody who puts in far fewer miles on city streets that may be icy during 4 months of the year.
Insurance pricing via GPS tracking anyone?
Posted by: Slocum at Mar 28, 2008 8:37:35 AM
I suspect the measuring problem is deeper than you think.
Driving 5k miles in the city is much more dangerous than 5k miles in the country. Suppose your client lives in the suburbs, how do you determine how much of his/her miles were in the city (with a bunch of cars) versus the suburbs (where there is less congestion)?
I suppose GPS could determine how much congestion you''re driving in. Nonetheless, a computerized odometer will not be sufficient.
Posted by: Scott Wentland at Mar 28, 2008 8:40:54 AM
Ted, do you live in the same Northern Virginia as I do?? There's traffic here at 4AM. I don't remember any magical time of no traffic and find it hard to imagine that could result from gas prices 30 or 40 cents higher than they are now.
Posted by: Cliff at Mar 28, 2008 8:41:39 AM
I'm surprised nobody has brought up privacy issues yet. Andrew Tobias' idea (collecting at the pump), pointed out earlier, though, is a reasonable solution though.
Posted by: Dave at Mar 28, 2008 8:47:23 AM
As mentioned, pay-as-you-drive insurance is available in the UK, though it's uncommon.
I would say there are a couple of problems with it. First, from a practical technological point of view, the tech needs to be fairly inexpensive, reliable and tamper proof. Second, people don't like to be monitored, which is what this system is doing.
These are barriers which can certainly be overcome though. For example, I think one major insurer in the UK is requiring policyholders to install a monitoring device for another purpose - to check whether they drive the vehicle at night. That sort of thing will soften people up to the concept. I wonder if cultural factors don't mean monitoring is more acceptable in continental europe and less so in the UK and US. Though Americans may be more willing to hand over data to companies, if it gets them cheaper driving. I think it's a strong bet that as the technology solidifies, people get used to it, and insurance companies demonstrate it's a good underwriting model, this sort of pricing will become common.
Posted by: Tim at Mar 28, 2008 8:47:51 AM
Note that the quoted paragraph leads with the condition that we are talking about a class defined by a number of characteristics. In other words, the calculation of the premium is a multivariate exercise, with different weights to different factors. Why should miles driven have a large weight (which is really what is being argued).
Posted by: Paul McMahon at Mar 28, 2008 8:49:51 AM
the model should also include population density. rural dwellers that drive many miles on virtually empty roads are also less likely to have accidents. we have many more of these people in the u.s. than europe.
Posted by: oops at Mar 28, 2008 8:52:16 AM
I fail to see how paying a 'flat rate' for insurance results in more traffic accidents et al. People are supposedly paying 'through the nose' for gasoline, and it seems to be having little effect on how much they drive. Why would pay-as-you-drive insurance change people's behaviour more than raising gas prices?
Most insurance companies in North America will ask you the distance of your commute to work and how many miles you intend to drive the vehicle over the year. Longer commutes and more annual miles may mean higher premiums.
In Ontario, Canada, you have to provide your insurance company name, policy number and the odometer reading when your renew your plates (which is either every year or two years). Supposedly, this information provided to insurance companies.
Posted by: Vincent Clement at Mar 28, 2008 8:55:28 AM
oops: The facts seem to state otherwise. In Alabama, between 2000 and 2000 there were 28.9 motor vehicle fatalities in rural areas versus 18.6 in urban areas. The lack of seat belt use in rural areas is a factor in the higher fatality rates. Also speeding is a major factor, especially in rural areas - seems those "virtually empty roads" are a licence to drive very fast.
http://www.arhaonline.org/rururbcomp.htm
http://www.nrharural.org/about/sub/different.html
http://www.ncbi.nlm.nih.gov/pubmed/10634275
http://www.google.com/search?q=vehicle+accidents+rural+versus+urban&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official
The second link in interesting. It mentions that despite one-third of motor vehicle accidents occurring in rural areas, two-third of motor fatalities occur in rural areas.
Posted by: Vincent Clement at Mar 28, 2008 9:15:51 AM
Nalebuff and Ayres devoted several pages of their book "Why Not?" to this problem -which they classified as "Can you see how the problems of too much driving can be solved? How can we get drivers to feel the pain of driving the extra miles."
After surveying an number of benefits and obstacles to the scheme, they conclude by saying "Few [insurance] companies want to embark on a course that alienates half their clientele. ... So, as long as the low mileage drivers are willing to keep subsidizing the high mileage ones, the incumbents are happy not to rock the boat."
interestingly, their solution to externality problem requires a solution to what Schelling called a mulit-person's prisoner's dilemma among insurance companies. Nobody wants to be first in the field, but everyone would be better of if more insurance companies offered the product.
Posted by: michael webster at Mar 28, 2008 9:34:16 AM
oy, that's silly. Tyler, please recall that insurers are already free to price discriminate across a very broad range of factors, there are a large number of competitors, low barriers to entry and low costs for consumers to switch carriers, a statistically enormous number of customers and the hazard rate is nontrivial.
So as repeatedly noted above, insurers do this to some extent already; further, it's combined with other criteria such as where the miles are driven, type of car, age of driver and the driver's full history including their credit scores. Hypothetically their rating would be better if each insured car provided GPS tracking, full telemetry and dashboard video feeds to the insurer, along with the identity and blood chemistry of the driver and passengers. But, really.
What's really surprising is that this is a proposal to have private auto insurers levy carbon taxes. Nice work if you can get it!
Posted by: misplaced trust co. at Mar 28, 2008 9:37:02 AM
GMAC is offering me a low rate for driving less. Since I have a GM car that has (1) a 12,000 mile/year lease and (b) OnStar technology, they know that I am otherwise incentivized (by the mileage penalties attached to the lease) to drive less than 12,000 miles/year, and they can easily monitor it.
I'll see what kind iof deal they offer me when my current policy is up.
Posted by: bartman at Mar 28, 2008 9:44:07 AM
