Leaping ahead in Netherlands, sliding backwards in Manchester

Pay As You Drive road pricing is closely related to PAYD insurance. Both are instruments that public policy makers can use to improve congestion, road usage and the costs associated with it. The concept of road pricing is charging road use on a usage base, and using the pricing to control or curb congestion. A good example of it is the inner London flat fee when you drive into London. A crude but effective way of making you think before you jump into your car and drive into London (like the traffic isn’t enough).

The problem with road pricing is that it is highly unpopular. I am always amazed that a change in toll fees for the cross-city tunnel in Sydney makes front-page news for a week (page 16 has children dying by the millions due to the Food Crisis). The voting public hates it when something they have for free suddenly has a price on it. And that is the problem. It is politically challenging for a politician to introduce sound policy in this space, particularly when people have to pay for it.

Two recent examples of success and failure are in the Netherlands and Manchester. In the Netherlands they announced a bold and spectacular program to get every car wired by 2016 and have accurate road pricing, linked to type of road, time of day and type of vehicle. PAYD insurance is so obvious once you’ve made that mind shift. Add to this the fact that the Netherlands has the highest use of bicycles in the world (having no hills has its advantages…), and you have a society where transport is going to be seriously responsible.

Contrast that with Manchester, where a public referendum said no in very certain terms to a road-pricing scheme), to the tune of 4 to 1. It is being heralded as the last rites to road-pricing (and slated as being a major step backwards for the Government (who established a multi billion dollar fund to support this) and for other cities with similar plans.
It will be interesting to understand the dynamics of how the Netherlands went about it, and what the factors were that made it successful, versus the Manchester stuff-up.

So what’s the solution to the Multiple Prisoners’ Dilemma?

Following the post on Multiple Prisoners’ Dilemma (see 22 November post), Justin Horner wrote to me and said I cannot just state a problem without stating the solution. Fair point. I don’t have the solution, but I can suggest some solutions:

1. From a Regulatory perspective the US is a fascinating place (in a morbid sort of way). It is legislated for example how you rate, meaning which rating factors you must use and what weights they must carry. So the easiest solution is: Mandate PAYD through regulation. Although it has been raised as a possibility in California, I think it is unlikely to happen though, and will definitely not happen here in Australia.
2. The Government and Regulators can do a few other things too. One of these is to waive taxes and duties on PAYD premiums. In Australia for example premiums are loaded with GST, Stamp Duty and in some states a Fire Services Levy. Waive these on PAYD policies and make them even more compelling for low mileage drivers. The tax revenue argument to justify this is that low mileage drivers are over paying for road usage anyway through normal taxation methods and car registration fees. Another argument is that it will shift people into PAYD quicker, meaning less driving (see 31 July 2008 post for the Brookings Institute paper on the impact of PAYD), resulting in lower cost of infrastructure for the Government, offsetting the lower tax collections on these policies. This will stimulate the market forces through increased consumer demand, which will in turn bypass the Prisoners’ Dilemma. There are a few other government interventions. The aim is to make the cost of car ownership as variable as possible. If car ownership becomes more variable, people will drive less, which will make PAYD insurance even more attractive. There are two sides to this, described in 3 and 4 below. 
3. Make the existing fixed existing cost variable. The prime examples of this in Australia are annual registration fees, which runs into a few hundred dollars, and compulsory third party (CTP) liability insurance, with currently regulated pricing. Clearly low mileage drivers are getting a raw deal on CTP. 
4. Toll the roads. If I drive down to the local supermarket (or almost anywhere in Sydney, as long as I avoid the bridge and some of the motor ways) it does not cost me anything. And yet I am using something that costs money to maintain. I should be paying for it on a usage basis, as opposed to a taxation basis where my usage has no bearing on what I pay in taxes. So if there is a direct correlation between my driving and the cost of using the road, I will no doubt be more responsible. I will drive less, which will in turn make PAYD insurance even more attractive. The second aspect of this is that technology is required to do accurate tolling. This is where PAYD and tolling at least in theory can meet. All PAYD products (other than Real Insurance and Milemeter) uses a form a telemetry. That can double for tolling. It won’t be politically popular, but it will work.
5. The Government can offer insurance companies incentives. These incentives can be targeted to ease the cost of system and product development, roll-out of telemetry for PAYD solutions requiring telemetry or even assist with promotion. The political endorsement and promotion does not cost any hard dollars, and can do a lot to stimulate the development of the product. A framework around this is suggested by Jason Bordoff and Pascal Noel of the Brookings Institute.
6. There are also things insurance companies can do to solve their Prisoner’s Dilemma. Looking from the outside at what Progressive has done, I suspect their angle of attack is to offer a voluntary product where people get adjustment on their future premiums based on their driving in the past. This is a reasonably “soft” way of introducing it into an existing portfolio, and time will tell how successful it will be.

What will be great is to see politicians and regulators getting engaged on the topic, and stimulating the development of PAYD. Everyone is watching Steve Poizner (Commissioner of Insurance in California), who is actively developing policy for California around Pay As You Drive. Many of the US states are watching and waiting to see what happens in California before they act. Hopefully Mr Poiznier will have the courage of his convictions to do something incisive and robust. We wait with interest.

In Australia, where we have an up and running product working really well, there has been no government interest to date. We live in hope.