Are Insurance Premiums The Key To Getting Americans To Drive Less?

Forget congestion pricing and higher gas taxes -- accurately priced pay-as-you-go auto insurance might be the best financial incentive tool for encouraging people to change their driving habits.

"Americans drive too much. This isn't a political or moral argument; it's an economic one..."

"[W]ith roughly three trillion miles driven each year producing more than $300 billion in externality costs, drivers should probably be taxed at least an extra 10 cents per mile if we want them to pay the full societal cost of their driving.

How can this be achieved? Higher tolls, especially variable tolls like congestion pricing, are one option. This seems to have worked well in London but was recently quashed in New York City, where the political hurdles proved too high.

A higher gas tax might also work. If a typical car gets 20 miles to the gallon, then the proper tax would be about $2 per gallon. But with the current high market price for gas and the political hysterics attached to it - well, good luck with that one.

This brings us to automobile insurance. While economists may argue that gas is poorly priced, that imbalance can't compare with how poorly insurance is priced."

"Aaron Edlin first noticed this imbalance more than 15 years ago. "I was a graduate student at Stanford," he says, "and I drove maybe 2,000 miles a year. But I paid roughly the same $1,000 as if I'd driven 10 times as much, which was a huge portion of my budget." A few years later, Edlin was serving on the President's Council of Economic Advisers when he floated an idea that economists had long found attractive: pay-as-you-drive (PAYD) insurance. It seemed like an obvious solution. Since no one expects to pay the same price for, say, a 60-minute massage as they pay for a 15-minute massage, why should people pay the same for insurance no matter how many miles they drove?

"The objection within the White House," Edlin recalls, "was there wasn't good academic research on the subject."

Edlin and a few others, including Jason Bordoff and Pascal Noel at the Brookings Institution, have since done such research. It makes a compelling case that PAYD insurance would work well, reducing the carbon emissions, congestion and accident risk created by too much driving while leading drivers to pay the true cost of their mileage. Bordoff and Noel put the total social benefit at $52 billion a year."

Full Story: Not-So-Free Ride



Only a small part of premiums

The number of miles driven leads to more accidents? The article doesn't mention that the amount of driving is only a part of how car insurance premiums are calculated.
Weighting the mileage factor too heavily downplays the real causes of car accidents. The business of car insurance companies is safety and compensation (and making money) not purely external environmental matters.

Some car insurers have factored greater driving times into their policies and the only difference here is that a device could be attached to verify your mileage. It's ok and as guy who drives less than the average American, I'd no problems with it.

Michael Lewyn's picture

Just quoting from the site...

"Where you live makes a difference. Folks living in areas with little or no traffic are likely to spend less on insurance than those living in congested cities or suburbs because areas with a lot of traffic tend to see more accidents."

These criteria don't seem all that related to accident risk, for two reasons. First, just because you live in a place without a lot of traffic doesn't mean that you drive in a place without a lot of traffic. Your life can take you to a congested central city, a congested suburban mall, or to a congested interstate (whether urban or suburban).

Second, even if you do all your driving in one neighborhood, the pure number of accidents would not measure risk, because some neighborhoods are less populated than others, and drivers from other neighborhoods would be coming through the same streets. So to calculate the true risk of accidents, it is not enough to learn the raw number of accidents, nor it is even enough to learn the number of accidents per neighborhood resident. Rather, a truly accurate calculation would have to also factor in vehicle counts for all neighborhood streets.

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