IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwple/9902002.html
   My bibliography  Save this paper

Per-Mile Premiums for Auto Insurance

Author

Listed:
  • Aaron S. Edlin

    (UC Berkeley & NBER)

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 a uniform per- gallon insurance charge could be $1.3 - $2.3 billion less due to heterogeneity in fuel efficiency. The total benefit 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 not have 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.

Suggested Citation

  • Aaron S. Edlin, 1999. "Per-Mile Premiums for Auto Insurance," Law and Economics 9902002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwple:9902002
    Note: Type of Document - Acrobat.pdf; prepared on IBM PC ; pages: 63; figures: separate document
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/le/papers/9902/9902002.pdf
    Download Restriction: no

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.
    3. 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.
    4. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
    5. 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 357-393, October.
    6. 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, University of Bath, vol. 42(1), pages 129-154, January.
    7. Parry, Ian W. H., 2004. "Comparing alternative policies to reduce traffic accidents," Journal of Urban Economics, Elsevier, vol. 56(2), pages 346-368, September.
    8. 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.
    9. 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.
    10. 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, January.
    11. 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.
    12. Tsai, Jyh-Fa & Chu, Chih-Peng & Hu, Shou-Ren, 2015. "Road pricing for congestion and accident externalities for mixed traffic of motorcycles and automobiles," Transportation Research Part A: Policy and Practice, Elsevier, vol. 71(C), pages 153-166.
    13. 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.
    14. 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.
    15. Kromer, Matthew A. & Bandivadekar, Anup & Evans, Christopher, 2010. "Long-term greenhouse gas emission and petroleum reduction goals: Evolutionary pathways for the light-duty vehicle sector," Energy, Elsevier, vol. 35(1), pages 387-397.
    16. Laszlo Goerke, 2003. "Road Traffic and Efficient Fines," European Journal of Law and Economics, Springer, vol. 15(1), pages 65-84, January.
    17. Parry, Ian W.H., 2003. "Comparing Alternative Policies to Reduce Traffic Accidents," Discussion Papers 10674, Resources for the Future.

    More about this item

    Keywords

    externalities; accidents; auto insurance; tort law;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwple:9902002. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.