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.