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Per-Mile Premiums for Auto Insurance

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  • Edlin, Aaron S.
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    Abstract

    Most insurance premiums are only weakly linked to mileage, and have largely lump-sum characteristics. The probable result is too many accidents and too much driving from the standpoint of economic efficiency. This paper develops a model of the relationship between driving and accidents that formalizes Vickrey's [1968] central insights about the accident externalities of driving. We use it to estimate the driving, accident, and congestion reduc- tions that could be expected from switching to other insurance pricing systems. Under a competitive system of per-mile premiums, in which insurance companies quote risk-classified per-mile rates, we estimate that the reduction in insured accident costs net of lost driving benefits would be $9.8 -$12.7 billion in the U.S., or $58-$75 per insured vehicle. When congestion reductions are considered, the net benefits rise to $15-$18 billion, exclusive of monitoring costs. The total benefits of per-mile premiums with a Pigouvian tax to account for accident externalities would be $19-$25 billion, or $111-$146 per insured vehicle, ex- clusive of monitoring costs. Accident externalities may go a long way toward explaining why most insurance companies have not switched to per-mile premiums despite these large potential social benefits.

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    File URL: http://www.escholarship.org/uc/item/9bn436k9.pdf;origin=repeccitec
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    Bibliographic Info

    Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt9bn436k9.

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    Date of creation: 30 Aug 2002
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    Handle: RePEc:cdl:oplwec:qt9bn436k9

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    Cited by:
    1. Delucchi, Mark A. & McCubbin, Donald R., 2010. "External Costs of Transport in the U.S," Institute of Transportation Studies, Working Paper Series qt13n8v8gq, Institute of Transportation Studies, UC Davis.
    2. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.

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