The End of All-You-Can-Drive Insurance

A lot is being written, said and blogged about in terms of Pay-As-You-Drive insurance. Much of it is repetition of what has being said already, and Bordoff and Noel of the Brookings Institute have been well and truly quoted many times.

I came across a write-up by Rob Inglis in a blog called “The New Republic” which eloquently states the case again. What makes it worth mentioning though were: 
a) It has a catchy title for traditional car insurance: “All-You-Can-Drive” Insurance, and
b) It has a really good discussion going in the comments section.

There are a number of misconceptions that were only partially cleared-up in the discussion.

Rural people will be penalized:
Untrue. Pay-As-You-Drive (PAYD) will not use mileage to replace all other factors, but to make risk pricing more accurate by using mileage in addition to the current rating factors. So the fact that people live rurally is already factored into car insurance pricing. What PAYD does is differentiate between low mileage and high mileage drivers in the rural area.

Insurance companies would have done it already if it made sense:
Untrue. The Multiple Prisoner’s Dilemma is the major factor that keeps them from doing it. Read the post on 22 November. Other factors include systems and regulations.

Progressive patents keep insurance companies from doing it:
Untrue. The opinion of carriers in the US is that the patents do not pose a barrier to them doing PAYD. See the diagram of the poll conducted amongst 90+ carriers in a recent Webinar. The stated obstacles in the poll were 46% systems, 20% privacy concerns, 18% cost of telemetry, 14% state regulations, and only 4% patent infringements. See Exigen for details.

Hurting vulnerable people is lousy social policy:
Untrue, within context. Hurting vulnerable people is not good. But subsidizing one group of people (high mileage drivers) through charging another group more (low mileage drivers), while at the same time creating a nasty externality that is akin to charging a flat rate for petrol regardless of usage, is lousy social policy. I have sympathy for people who will pay more. But the problem should be viewed in full context.

Mileage does not relate to risk:
Untrue. Simplistically, if you’re not driving, you cannot make an accident. The curves are not linear, and the curves differ for different profiles of drivers. Data and experience will fine-tune exact pricing over time. But the basic premise is sound AND meaningful.

The cost of implementing outweighs the benefits:
Untrue. Two solutions exist already that do not rely on telemetry or ongoing inspections. One is Real Insurance and the other Milemeter. Even for telemetry based solutions the cost of the technology is rapidly decreasing, and the device types are cheap and easy to implement.

The full posting of the blog can be seen at The New Republic.