Sydney-siders increasingly vulnerable to oil price and mortgage cost pressure

MORE than 40 per cent of Sydney's suburbs have become increasingly vulnerable to high oil prices and mortgage stress in the past five years, according to a study to be released today by Griffith University.

While those on the far-western fringe of Sydney are the most car dependent and burdened by household debt, a new wave of vulnerability at the bowser has washed through middle-ring suburbs such as Liverpool, Hurstville and Blacktown.

While vulnerability to oil prices declined in some pockets of the city, for example in the northern suburbs between North Rocks and Pymble, big areas became more acutely exposed to high prices. Parramatta and Blacktown increased on the scale, as did other areas such as Penrith, Hornsby, Mona Vale, Sylvania and La Perouse.

The study, Unsettling Suburbia: The New Landscape Of Oil And Mortgage Vulnerability In Australian Cities, assesses the way car use, income and mortgage repayments combine in the suburbs of each capital city.

Based on the 2006 census data, the research by Jago Dodson and Neil Snipe found an increasing number of Sydney suburbs were becoming "oil vulnerable".

"In Sydney high oil and mortgage vulnerability is distributed across much of the city's western suburbs, including Hebersham, Green Valley, Cabramatta and Canterbury in the mid and outer west," the report said.

"The number of areas in which oil and mortgage vulnerability increased over the 2001 to 2006 period far outweighed those in which oil and mortgage vulnerability declined," the paper says.

While people in far outer suburbs remain highly exposed to debt and car-related costs, they have been "joined by increasingly vulnerable neighbouring middle suburban areas".

About 18 per cent of Sydney's suburbs have become less vulnerable, the study finds. But this is eclipsed by those areas worse off, as "41 per cent saw their oil and mortgage vulnerability worsen between 2001-2006".

The study relied on an index created by the researchers dubbed VAMPIRE - vulnerability assessment for mortgage, petrol and inflation risks and expenditure. It combines census data on the proportion of people in each district that commute to work in a car, households with two or more cars, the median weekly household income, and the number of households being bought through a mortgage.

Big swathes of Sydney are already changing their travel patterns in response to rising petrol prices, by switching to public transport in record numbers and cutting back on non-essential car trips.

The study says the wider effects of recent oil rises are yet to be felt. "The full impacts of the dramatically higher 2008 fuel prices will probably not be seen until the early years of the next decade. In this context the problem of household socio-economic vulnerability and exposure to the impacts of higher fuel prices and mortgage interest rates remains highly relevant."

The authors say state planning policies have often contributed to the increasing social isolation of many suburbs where people rely increasingly on cars.

"The problems of suburban infrastructure deficits, especially in public transport, reflect the consistent failure of state governments to expand infrastructure to keep pace with the rate and scale of land development," the paper says. "These problems have been exacerbated by the planning of suburban areas around automobile travel."

As a result of housing, employment and transport planning in Sydney, the poorer communities carry the greatest burden of oil stress. "Households in middle and outer suburbs face higher levels of car dependence and fewer alternative travel options than those in the inner areas … This means that the costs of higher fuel prices will be borne most heavily by those with the least capacity to pay."

Source: Sydney Morning Herald, 11 August, by Linton Besser, Transport Reporter

Australia's Lifestyle Revolution

Excerpt:
"That lead me to my next encounter and potentially the most dramatic weekend story. A senior insurance executive told me that he was puzzled by the latest trends in car insurance. It was too early too tell (“come back in three months”, he said) but there were signs that a lot of people were locking up their second car and using it only when they had to. Accordingly, they were not comprehensively insuring it."

Article
I had one of those weekends where I kept running into people with fascinating perspectives on the looming acceleration of the economic downturn. My conclusion is that the early indicators we have seen are the forerunner of a much steeper downturn which will unfold over the next six months.

There is no doubt interest rates will fall. However, there are also signs that a legacy of this downturn may be dramatic lifestyle changes.

My first encounter was with a national display home builder and marketer who told me that his current sales were down only marginally but that attendances at his display villages were down 40 per cent in Queensland and Victoria.

He had checked with his rivals and found they were having a similar experience. In NSW it has been a disaster for a long time. Those lower numbers will almost certainly translate into a large fall in new home orders and, later, in building. What surprised the builder is what is happening in Queensland. He had believed for a while that Victoria was too strong, but had expected Queensland to hold.

The obvious cause was that the combination of higher interest rates, a credit squeeze, a very tough time for contractors, plus higher food and fuel prices that were slashing demand for new homes. But a rather unexpected reason bobbed up – people were not driving their cars at the weekend unless they really had to.

That lead me to my next encounter and potentially the most dramatic weekend story. A senior insurance executive told me that he was puzzled by the latest trends in car insurance. It was too early too tell (“come back in three months”, he said) but there were signs that a lot of people were locking up their second car and using it only when they had to. Accordingly, they were not comprehensively insuring it.

If that turns into a lifestyle change then we are in for a enormous blow to all sectors of the motor industry – makers, retailers, toll roads and repairers. It will transform public transport. By coincidence, in Victoria over the weekend the local transport minister was explaining how the weekend use of buses had skyrocketed. These building, insurance and bus anecdotes may be early indicators of an unprecedented lifestyle change.

Later, I ran into some Harvey Norman people who said they were enjoying the pre-Olympic boom in TV sets, but all the signs were there for a steep fall in activity.

A major social organisation which is supported by a large number of contractors reports that its annual dinner dance, which is normally rushed, sold less than 30 tickets – break even is about 160. The event was cancelled.

In Victoria the slump is being accentuated by the looming dramatic rise in private school fees in 2009 after Premier John Brumby handed out double-digit pay rises for key teacher classifications, but gave no extra money to private schools. Kevin Rudd has not come to the party.

What people on the edge are doing is budgeting and cutting down all unnecessary expenditure and this will show up in some very dramatic declines in the next six months.

Source: Business Spectator, written by Robert Gottliebsen

Real Insurance's new product

Real Insurance now offers Pay-As-You-Drive car insurance in Australia. Under their product consumers are trusted to report their odometer reading at the beginning of the policy term and purchase a certain number of kilometers. Odometer readings are verified if there is a claim, giving motorists an incentive to be accurate (false odometer readings void coverage).

Link to their website:
www.payasyoudrive.com.au

Pay-As-You-Drive Car Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity

July 2008 —

ABSTRACT

The current lump-sum pricing of auto insurance is inefficient and inequitable. Drivers who are similar in other respects—age, gender, location, driving safety record—pay nearly the same premiums if they drive five thousand or fifty thousand miles a year. Just as an all-you-can-eat restaurant encourages more eating, all-can-drive insurance pricing encourages more driving. That means more accidents, congestion, carbon emissions, local pollution, and dependence on oil. This pricing system is inequitable because low- mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average.

In this discussion paper, we propose and evaluate a simple alternative: pay-as-you-drive (PAYD) auto insurance. If all motorists paid for accident insurance per mile rather than in a lump sum, they would have an extra incentive to drive less. We estimate driving would decline by 8 percent nationwide, netting society the equivalent of about $50 billion to $60 billion a year by reducing driving-related harms. This driving reduction would reduce carbon dioxide emissions by 2 percent and oil consumption by about 4 percent. To put it in perspective, it would take a $1-per-gallon increase in the gasoline tax to achieve the same reduction in driving. Unlike an increase in the gas tax, PAYD would save most drivers money regardless of where they live. We estimate almost two-thirds of households would pay less for auto insurance, with each of those households saving an average of $270 per car.

Despite the large social benefits from PAYD, there are currently several barriers to its widespread adoption, including the cost to monitor miles traveled and some state insurance regulations. In order to facilitate the spread of PAYD, we propose a three-part strategy. First, states should pass legislation permitting mileage-based insurance premiums. Second, the federal government should increase the funding available to PAYD pilot programs by $15 million over five years. Finally, since the monitoring costs may exceed the expected benefit of PAYD to insurance firms but are much smaller than the social benefit, the federal government should offer a $100 tax credit for each new mileage-based policy that an insurance company writes, to be phased out once 5 million vehicles nationwide are covered by PAYD policies. In short, PAYD represents a win-win policy. What is good for drivers, in this case, is also good for society.

Source: Brookings Institute

View full paper »

State Considers Pay-As-You-Drive Auto Insurance

Here is an article in Yesterday's LA Times. There are also 50 public comments, representing the general range of concerns and misunderstandings. - Todd Litman

A plan that charges motorists based on miles driven could cut fuel use, pollution and traffic as well as lower premiums, say backers. Opponents worry about privacy issues.
By Marc Lifsher, Los Angeles Times
http://www.latimes.com/classified/automotive/highway1/la-fi-carinsure15-2008jul15,0,2725003.story

SACRAMENTO -- An alliance of insurance companies and environmentalists wants to bring a new kind of mileage-based auto insurance to California and charge motorists only for the number of miles actually driven.

Called pay as you drive, the option is available from a few insurers in 34 states -- but not California -- as well as Canada, Japan and Europe.

One company, GMAC Insurance Group, says its customers -- whose mileage is tracked by General Motors Corp.'s OnStar system -- have reduced the premiums they pay by 13% to 54%. And California drivers could expect to get similar savings if pay as you drive is approved here.

The system could cut motoring costs, protect the environment and reduce traffic congestion, boosters say. Opponents, mainly privacy advocates, say they fear that insurance companies could begin tracking more than just a driver's mileage. High-mileage drivers could also see higher rates.

People who agree to tie their insurance premiums directly to miles driven are likely to make the maximum effort to stay out of their cars. That way, proponents say, they'll save money on gasoline and insurance, the top two costs of owning a car.

"I'm getting good savings," said Mark Holcomb, a retired federal worker, who recently moved from San Diego to a suburb of Orlando, Fla. "I'm not driving so much, so my likelihood of an accident is lower."

Holcomb said he cut his insurance bill by $634 a year for his Cadillac Escalade and his Saab convertible by switching to a GMAC pay-as-you-drive policy.

The concept, if applied nationwide, would do a lot more than cut insurance bills, says a study by the Brookings Institution, a Washington think tank. Pay as you drive could create $52 billion in annual benefits from fewer accidents, reduced traffic and pollution, and less reliance on foreign oil, the study concludes.

"This is a tool to reward drivers who actually drive less," said Assemblyman Jared Huffman (D-San Rafael), the author of a bill in the Legislature, AB 2800, to authorize pay as you drive in California.

Huffman's measure is sailing through the Legislature with little opposition. State Insurance Commissioner Steve Poizner is working on regulations that would put a similar proposal on the books.

Pay-as-you-drive skeptics say they're all for reducing auto use but are wary about how insurers might keep tabs on their customers. Others worry that the deep discounts offered urban drivers, who don't use their cars much, could be offset by making rural motorists pay more.

"The grocery store could be nine miles away," said Assemblyman Joel Anderson (R-San Diego), who voted against the Huffman bill. "I don't want to punish people" who live in the country.

GMAC and a second insurer, Progressive Corp., report widespread customer acceptance of their pay-as-you-drive policies in other states. Progressive says that about one-third of its new customers are volunteering for pay-as-you-drive pilot programs underway in Minnesota, Michigan and Oregon. GMAC says it has signed up 30,000 policyholders nationwide for a low-mileage discount program.

Proponents, including trade groups representing most major insurance companies, say that now is the perfect time for pay as you drive. With gasoline prices near $5 a gallon and likely to head higher, motorists are changing their driving patterns.

Last month the U.S. Department of Transportation reported that Americans drove 1.4 billion fewer miles in April than they did a year earlier.

But privacy advocates worry that companies might install sophisticated GPS devices on cars that would communicate via satellite where and when motorists travel and whether they are speeding or driving recklessly.

"It's going to give insurance carriers your exact location at all times and could wind up being subpoenaed in divorce proceedings and other lawsuits," said Paul Stephens of the Privacy Rights Clearinghouse in San Diego.

Insurance experts suggest that privacy concerns may have been the undoing of a pay-as-you-drive product launched two years ago by Britain's largest auto insurance company, Norwich Union. In June the company canceled its program after only 10,000 customers signed up.

Huffman said he didn't want to make the same mistake. He said his bill would allow the tracking of mileage but didn't endorse GPS surveillance. His bill would leave details about how to record mileage to the California Department of Insurance.

Poizner said he intended to explore techniques that are less invasive than GPS. Those include using electronic monitors that check only odometer readings, accessing maintenance records and authorizing smog inspection stations to report mileage readings.

Under California law, the number of miles driven in a year is the second-most-important factor that insurers must use to compute a customer's premium. But companies complain that policyholders' estimates of how much they drive often are way off the mark. According to a 2006 Department of Insurance study, 56% of policyholders underreported annual driving.

"Allowing drivers to submit 'estimates' of inaccurate mileage breaks the connection between conduct and consequences," said a letter to the Assembly Insurance Committee from the Personal Insurance Federation of California, a trade group.

Said Yves Didier, who commutes from the San Fernando Valley to work as a police officer at Los Angeles International Airport, "Giving motorists a chance to save money by driving less is a good idea, as long as it's strictly voluntary.

"I personally would not want a device in my vehicle. I feel like it's another step toward Big Brother watching me," he added. "But if it's voluntary, I don't see any harm. It would create a benefit for the environment and obviously to certain customers."

marc.lifsher@latimes.com

Pay-As-You-Drive Insurance: Recommendations for Implementation

Abstract

This paper provides guidance for implementing Pay-As-You-Drive (PAYD) vehicle insurance, which directly incorporates mileage as a rate factor. It describes PAYD pricing options, discusses PAYD benefits and costs, describes regulatory reforms, evaluates various objections to PAYD, and provides specific recommendations for PAYD implementation. Various data sources indicate that crash costs increase with annual vehicle mileage. As a result, PAYD increases actuarial accuracy (premiums better reflect a vehicle's claim costs). PAYD pricing rewards motorists when they reduce their mileage, providing financial savings and additional benefits including increased safety, congestion reduction, road and parking facility cost savings, energy conservation, emission reductions, and increased insurance affordability.

Although there are several possible ways to implement PAYD insurance, some provide more benefits than others. Insurance regulators can maximize benefits by defining performance standards that policies must meet to be considered PAYD, as described in this paper. Critics raise various objections to PAYD pricing, but many of these are technically inaccurate or can be addressed with appropriate implementation practices.

Source: Todd Litman

Victoria Transport Policy Institute

16 June 2008

Freakonomics

Not-So-Free Ride

By STEPHEN J. DUBNER and STEVEN D. LEVITT

Published: April 20, 2008, in the Green Issue of the New York Times Magazine

The trouble with negative externalities

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

Because there are all sorts of costs associated with driving that the actual driver doesn't pay. Such a condition is known to economists as a negative externality: the behavior of Person A (we'll call him Arthur) damages the welfare of Person Z (Zelda), but Zelda has no control over Arthur's actions. If Arthur feels like driving an extra 50 miles today, he doesn't need to ask Zelda; he just hops in the car and goes. And because Arthur doesn't pay the true costs of his driving, he drives too much.

What are the negative externalities of driving? To name just three: congestion, carbon emissions and traffic accidents. Every time Arthur gets in a car, it becomes more likely that Zelda — and millions of others — will suffer in each of those areas.

Which of these externalities is the most costly to U.S. society? According to current estimates, carbon emissions from driving impose a societal cost of about $20 billion a year. That sounds like an awful lot until you consider congestion: a Texas Transportation Institute study found that wasted fuel and lost productivity due to congestion cost us $78 billion a year. The damage to people and property from auto accidents, meanwhile, is by far the worst. In a 2006 paper, the economists Aaron Edlin and Pinar Karaca-Mandic argued that accidents impose a true unpaid cost of about $220 billion a year. (And that's even though the accident rate has fallen significantly over the past 10 years, from 2.72 accidents per million miles driven to 1.98 per million; overall miles driven, however, keep rising.) So, with 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. Imagine that Arthur and Zelda live in the same city and occupy the same insurance risk pool but that Arthur drives 30,000 miles a year while Zelda drives just 3,000. Under the current system, Zelda probably pays the same amount for insurance as Arthur.

While some insurance companies do offer a small discount for driving less — usually based on self-reporting, which has an obvious shortcoming — U.S. auto insurance is generally an all-you-can-eat affair. Which means that the 27,000 more miles than Zelda that Arthur drives don't cost him a penny, even as each mile produces externalities for everyone. It also means that low-mileage drivers like Zelda subsidize high-mileage drivers like Arthur.

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.

The better news is that PAYD insurance is no longer just an academic exercise. G.M.A.C. has begun using OnStar technology to offer mileage discounts, and next month Progressive will roll out a comprehensive PAYD plan called MyRate. Progressive, the huge Ohio-based insurer that has long prided itself as an innovator, will first offer the plan in six states, having run a similar pilot in three other states. Drivers who sign up for MyRate will install a small wireless device in their cars that transmits to Progressive not just how many miles they drive but also when those miles are driven and, to some extent, how they are driven: the device measures the car's speed every second, from which Progressive can derive acceleration and braking behavior. Which means that Progressive will not only be able to charge drivers for the actual miles they consume but will also better assess the true risk of each driver.
If PAYD is such a great idea, why has it taken so long? There are at least three reasons: the tracking technology has only recently become affordable; insurers were anxious about drivers' privacy concerns; and there was a substantial risk for whichever company was first to offer PAYD on a large scale.

Participation in the MyRate program is voluntary, and that's where the economics get interesting. As with most incentive changes, there will be winners and losers. The clearest winners are people like Zelda, who can drive the same distance they used to drive and pay less. What's less obvious is whether Progressive will be a winner; there are, in fact, a couple of situations in which Progressive could lose out. If all MyRate accomplishes is to give Progressive's low-mileage customers the rate cut they deserve, then Progressive is doing little more than lowering its own revenues. It could, of course, try to compensate by raising rates on all its high-mileage Arthurs, but then there's nothing to stop Arthur from buying his insurance elsewhere. (Of course, losing its riskiest customers to other companies might also prove profitable for Progressive.)

If, however, Progressive can corner the Zelda market by stealing millions of Zeldas from other insurers, then it could make a killing by being the first to sell accurately priced insurance for low-mileage drivers. The bigger goal for society — and the wild card in this or any incentive shift — is to create real behavior change. And that is always easier said than done. But if Progressive's PAYD insurance can induce some of its high-mileage customers to drive less and especially to drive more safely, resulting in smaller claims payouts for Progressive and fewer negative externalities for everyone, then it could truly be a win-win-win situation.

Except, perhaps, for Progressive's rivals.