Aug 24, 2008
These guys at Brookings—it’s just think, think, think, with them. Well, I guess that’s what a think tank is for.

Now they’ve come up with an insurance plan called Pay As You Drive. The plan, outlined in a recent report, entitled “The Impact of Pay-As-You-Drive Auto Insurance in California,”—well, that says it all. In California, according to this report, 20 percent of drivers drive 46 percent of the miles driven. Auto insurance costs are basically the same for everyone, with some variation built in for age, driving record, age of vehicle, etc., without any consideration given to miles driven. If we start considering that important variant in the pricing of auto insurance, 64 percent of households in California would have lower premiums. Not only that, but other benefits would accrue as well:

• There would be an 8 percent reduction in driving from light-duty vehicles (the kind you and I drive).
• The social benefits from reduced accidents and congestion would total over $10 billion per year.
• The state of California would save $54 million a year due to reduced medical payments and spending on emergency services.
• The reduced driving could provide 7 to 9 percent of the total CO₂ reductions needed to meet California’s targets for 2020.
• Low-income drivers would benefit the most because they tend to drive the fewest miles.

The point of insurance is to share the cost of the risk inherent in the activity being insured, with all of us knowing that only a fraction of us will suffer the costs of those risks during the term of the coverage. We are betting we will be among those suffering those costs, which is why we are willing to pay a fraction of them.

The Brookings solution argues, in effect, that the person who drives 20,000 miles a year is ten times more likely to suffer the risky outcomes of that activity than the person who drives 2,000 miles a year; however, I am not at all sure that is the case. Simple math does not always suffice to gauge or predict human activity. The struggling salesman who puts 100,000 miles on his odometer every year may very well be a great deal more adept at the wheel than the millionaire octogenarian who only drives his Lexus to church every week. The variations built into auto insurance already, and mentioned above—age, past driving record, value of one’s vehicle—are probably by themselves adequate and sufficient criteria for justifying variable rates, and perhaps we only need to tweak those rates some to realize the other beneficial outcomes listed above.

I could be wrong about that. However, this Brookings report contains nothing to convince me of that.
tags: Transportation | Oil and Gasoline

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