AltInst: Per-Mile Premiums for Auto Insurance

From: Robin Hanson <>
Date: Fri Mar 05 1999 - 16:09:54 PST

63; figures: separate document
Keywords: externalities, accidents, auto insurance, tort law
JEL: K13, H23
Report-no: IBER-CalBerk E99-262
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.
\\ (ewp-le/9902002 , 0kb + 568kb)

Robin Hanson
RWJF Health Policy Scholar FAX: 510-643-8614
140 Warren Hall, UC Berkeley, CA 94720-7360 510-643-1884
after 8/99: Assist. Prof. Economics, George Mason Univ.

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Received on Fri Mar 5 17:19:39 1999

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