Policy Research

Distance Based Vehicle Insurance Feasibility, Costs and Benefits

Todd Litman

Summary

The article examines different methods for taxing drivers on a per-mile basis and attempts to predict the effects each would have. The study looks at 7 different systems that could be implemented but determines that the most efficient is to require insurance companies to include mileage as a factor for insurance premiums via a mandatory installation that they claim will cost only $6. The article argues that by implementing this system, a host of benefits will arise such as increased progressivity. They argue that drivers with higher incomes tend to drive more miles, so implementing a pay per mile system would allow people to be taxed progressively. Additionally the study argues that insurance premiums would see increases in actuarial fairness. This is because people would be paying with increased accuracy for the threat they pose, based on a statistic that accident rate is correlated with mileage. It was also estimated that creating incentives to drive less will save insurance companies money, reduce carbon emissions, and free up congestion on roads.

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Policy Implications

This article can be used in attempting to create policy that increases equity in insurance markets. The study argues that having mandatory mileage gauges installed is relatively low in transaction costs, but provides a large quantity of benefits. Additionally, the article mentions that political environment may make it difficult to implement mandatory gauges but allowing for optional installation of gauges would be popular and likely adopted by roughly 50% of consumers. Other methods with gains are also discussed such as per minute premiums or using GPS to alter rates for different routes and distances.