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Per-Mile Premiums for Auto Insurance

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  • Aaron S. Edlin

    (University of California, Berkeley)

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 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 Info

Paper provided by EconWPA in its series Law and Economics with number 0303001.

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Length: 51 pages
Date of creation: 19 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwple:0303001

Note: 51 pages, Acrobat .pdf
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Web page: http://128.118.178.162

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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. Parry, Ian, 2003. "Comparing Alternative Policies to Reduce Traffic Accidents," Discussion Papers dp-03-07, Resources For the Future.
  2. 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.
  3. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
  4. 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.
  5. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  6. Edlin, Aaron S. & Karaca-Mandic, Pinar, 2007. "The Accident Externality from Driving," Berkeley Olin Program in Law & Economics, Working Paper Series qt6179d3nw, Berkeley Olin Program in Law & Economics.
  7. Kleit, Andrew N., 2002. "Impacts of Long-Range Increases in the Corporate Average Fuel Economy (CAFE) Standard," Working paper 289, Regulation2point0.
  8. Edlin, Aaron S. & Karaca-Mandic, Pinar, 2005. "The Accident Externality from Driving," Department of Economics, Working Paper Series qt0hw1m6q2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. 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.
  10. 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.
  11. Ian W. H. Parry, 2005. "Is Pay-as-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?," American Economic Review, American Economic Association, vol. 95(2), pages 288-293, May.
  12. 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.
  13. Laszlo Goerke, 2003. "Road Traffic and Efficient Fines," European Journal of Law and Economics, Springer, vol. 15(1), pages 65-84, January.
  14. Lutter, Randall, 1999. "Is EPA's Ozone Standard Feasible?," Working paper 412, Regulation2point0.
  15. Edlin, Aaron S. & Karaca-Mandic, Pinar, 2005. "The Accident Externality from Driving," Department of Economics, Working Paper Series qt2h23t6rt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  16. Alma Cohen & Rajeev Dehejia, 2003. "The Effect of Automobile Insurance and Accident Liability Laws in Traffic Fatalities," NBER Working Papers 9602, National Bureau of Economic Research, Inc.
  17. 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.
  18. Li, Shanjun, 2009. "Traffic Safety and Vehicle Choice: Quantifying the Effects of the "Arms Race" on American Roads," Discussion Papers dp-09-33, Resources For the Future.

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