Per-Mile Premiums for Auto Insurance
AbstractMost 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  central insights about the accident externalities of driving. We use it 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 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, exclusive 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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Bibliographic InfoPaper provided by EconWPA in its series Law and Economics with number 0303001.
Length: 51 pages
Date of creation: 19 Mar 2003
Date of revision:
Note: 51 pages, Acrobat .pdf
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Other versions of this item:
- Aaron S. Edlin, 1999. "Per-Mile Premiums for Auto Insurance," Law and Economics 9902002, EconWPA.
- Aaron S. Edlin., 1999. "Per-Mile Premiums for Auto Insurance," Economics Working Papers 99-262, University of California at Berkeley.
- Aaron S. Edlin, 1999. "Per-Mile Premiums for Auto Insurance," NBER Working Papers 6934, National Bureau of Economic Research, Inc.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-25 (All new papers)
- NEP-IAS-2003-03-25 (Insurance Economics)
- NEP-LAW-2003-03-25 (Law & Economics)
You can help add them by filling out this form.
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- Are Economists Good at Business?
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