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Per-Mile Premiums for Auto Insurance

Aaron Edlin ()

Law and Economics from University Library of Munich, Germany

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.

JEL-codes: K0 H0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-law
Date: 2003-03-19
Note: 51 pages, Acrobat .pdf
References: Add references at CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

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https://econwpa.ub.uni-muenchen.de/econ-wp/le/papers/0303/0303001.pdf (application/pdf)

Related works:
Working Paper: Per-Mile Premiums for Auto Insurance (1999) Downloads
Working Paper: Per-Mile Premiums for Auto Insurance (1999) Downloads
Working Paper: Per-Mile Premiums for Auto Insurance (1999) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwple:0303001

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