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Per-Mile Premiums for Auto Insurance

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  • Aaron S. Edlin

Abstract

Americans drive 2,360,000,000,000 miles each year, far outstripping other nations. Every time a driver takes to the road, and with each mile she drives, she exposes herself and others to the risk of accident. Insurance premiums are only weakly linked to mileage, however, and have largely lump-sum characteristics. The result is too much driving and too many accidents. This paper begins by developing a model of the relationship between driving and accidents that formalizes Vickrey's [1968] central insights about the accident externalities of driving. We use this model to estimate the driving, accident, and congestion reductions 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 nationally, or $58 -$75 per insured vehicle. When uninsured accident cost savings and congestion reductions are considered, the net benefits rise to $25 -$29 billion, exclusive of monitoring costs. The total benefits of uniform per-gallon insurance charge could be $1.3 -$2.3 billion less due to heterogeneity in fuel efficiency. The total benefits of optimal' per-mile premiums in which premiums are taxed to account for accident externalities would be $32 -$43 billion, or $187 - $254 per vehicle, exclusive of monitoring costs. One reason that insurance companies may have not switched to per-mile premiums on their own is that most of the benefits are external and the transaction costs to the company and its customers of checking odometers could exceed the $31 per vehicle of gains that a single company could temporarily realize on its existing base of customers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6934.

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Date of creation: Feb 1999
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Handle: RePEc:nbr:nberwo:6934

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  1. Are Economists Good at Business?
    by Matthew E. Kahn in Environmental and Urban Economics on 2010-07-08 02:05:00
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Cited by:
  1. Cohen, Alma & Dehejia, Rajeev, 2004. "The Effect of Automobile Insurance and Accident Liability Laws on Traffic Fatalities," Journal of Law and Economics, University of Chicago Press, vol. 47(2), pages 357-93, October.
  2. Santos, Georgina & Behrendt, Hannah & Maconi, Laura & Shirvani, Tara & Teytelboym, Alexander, 2010. "Part I: Externalities and economic policies in road transport," Research in Transportation Economics, Elsevier, vol. 28(1), pages 2-45.
  3. Steimetz, Seiji S.C., 2008. "Defensive driving and the external costs of accidents and travel delays," Transportation Research Part B: Methodological, Elsevier, vol. 42(9), pages 703-724, November.
  4. Shanjun Li, 2012. "Traffic safety and vehicle choice: quantifying the effects of the ‘arms race’ on American roads," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(1), pages 34-62, 01.
  5. Lutter, Randall, 1999. "Is EPA's Ozone Standard Feasible?," Working paper 412, Regulation2point0.
  6. Kleit, Andrew N., 2002. "Impacts of Long-Range Increases in the Corporate Average Fuel Economy (CAFE) Standard," Working paper 289, Regulation2point0.
  7. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  8. Kravitz, Troy & Lutter, Randall, 2003. "Do Regulations Requiring Light Trucks To Be More Fuel Efficient Make Economic Sense? An Evaluation of NHTSA's Proposed Standards," Working paper 223, Regulation2point0.
  9. Kopits, Elizabeth & Cropper, Maureen, 2005. "Why have traffic fatalities declined in industrialized countries ? Implications for pedestrians and vehicle occupants," Policy Research Working Paper Series 3678, The World Bank.
  10. Parry, Ian, 2003. "Comparing Alternative Policies to Reduce Traffic Accidents," Discussion Papers dp-03-07, Resources For the Future.
  11. Laszlo Goerke, 2003. "Road Traffic and Efficient Fines," European Journal of Law and Economics, Springer, vol. 15(1), pages 65-84, January.
  12. 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.
  13. Parry, Ian, 2005. "Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?," Discussion Papers dp-05-15, Resources For the Future.
  14. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
  15. Gerard, David & Lave, Lester B., 2003. "The Economics of CAFE Reconsidered: A Response to CAFE Critics and A Case for Fuel Economy Standards," Working paper 139, Regulation2point0.

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