An alternative to carbon taxes: pay-by-the-mile auto insurance?
Pay by the mile policies would have drivers pay for their insurance based on the number of miles they drive. The numbers are dramatic. The average car is driven about 10,000 miles a year, which translates into 10 cents a mile for a $1,000 a year policy. For a car that gets 20 miles a gallon, this would provide the same disincentive to drive as a $2 per gallon gas tax. Unlike a gas tax, pay-by-the-mile insurance does not raise the average cost of insurance at all.
Baker doesn’t go into much detail in terms of exactly what he’s proposing, so it’s hard to judge it. If insurance companies offered the option of pay-by-the-mile insurance, there would be a kind of moral hazard issue: the people with the highest mileage would simply not choose that option. And even if an insurance company moved to pay-by-the-mile for everybody, the moral hazard would remain: the people with the highest mileage would move to a different company. So in order for this to work, there would need to be some kind of legislation forcing every car insurance company to change the entire methodology with which it prices insurance. And in fact, given that the insurance industry is regulated at the state and not the federal level, there would need to be near-simultaneous passage of such laws in 50 different states at once. Or am I missing something here?
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Their are a few problems with the scheme in general, though none are insurmountable:
- the problem of offering the scheme as an option is that it would induce adverse (anti) selection not moral hazard. This option could be priced in the same manner as other options in the insurance industry but the effect of anti-selection would of course be impossible to model a priori.
- The anti-selection issue might well play into a firms favour. If the amount of miles driven is a good risk factor for insurance models (as it most likely is), and as those driving less would gain from switching, then the firm offering the product would benefit from getting all the good risks in the industry as those risks would pay a lower premium (despite paying the same ‘risk premium’). This would enable the firm to achieve higher volumes and market share.
- the downsides are that you shall lose all the higher mileage drivers; have increased administrative and underwriting costs; and may struggle to market the new product to the market.
Those driving fewer miles but commuting to work in congested cities likely face the greater risk from an automobile accident requiring the payout to fix the auto or pay third party damages than say a long haul trucker or even a traveling salesman that clocks many miles, but mainly on freeways or highways where there may be fewer, but more serious accidents. And is auto insurance the right vehicle to tax carbon emissions? Or a scheme to protect insurees from their own and others accidents? Why not just tax by the mile driven via either taxes on gasoline? Lower for those that drive fewer miles. To by the mile via electronic tags that measure miles actually driven? Much simpler.
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