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Per-Mile Premiums for Auto Insurance

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Author Info

  • 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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File URL: http://128.118.178.162/eps/le/papers/0303/0303001.pdf
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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. 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. Laszlo Goerke, 2003. "Road Traffic and Efficient Fines," European Journal of Law and Economics, Springer, vol. 15(1), pages 65-84, January.
  3. 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.
  4. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
  5. Lutter, Randall, 1999. "Is EPA's Ozone Standard Feasible?," Working paper 412, Regulation2point0.
  6. 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.
  7. 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.
  8. 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.
  9. Elizabeth Kopits & Maureen Cropper, 2008. "Why Have Traffic Fatalities Declined in Industrialised Countries?: Implications for Pedestrians and Vehicle Occupants," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 42(1), pages 129-154, January.
  10. 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.
  11. Parry, Ian, 2003. "Comparing Alternative Policies to Reduce Traffic Accidents," Discussion Papers dp-03-07, Resources For the Future.
  12. 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.
  13. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  14. Kleit, Andrew N., 2002. "Impacts of Long-Range Increases in the Corporate Average Fuel Economy (CAFE) Standard," Working paper 289, Regulation2point0.
  15. 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.

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