Unmetered Premiums Subsidize Overuse of Automobile Transportation

V OTER APPROVAL OF CALIFORNIA’S PROPOSITION 103 in 1988 signaled strong consumer rejection of the current automobile insurance pricing system. Nevertheless, insurers are refusing to admit that this stinging rebuke indicates a need for fundamental change. Shortly after the election, Terr); Tyrpin, assistant gener.11 counsel for the National Association of Independent Insurers (NAII), protested that, “One thing we should not do is allow ourselves to accept the full, or even the major responsibility for containing insurance costs. . . WC (cannot tell motorists to drive less.” Tyrpin went on to sug,gest that in order to reduce insurance costs, society “may need to build better public transportation systems and create incentives to USC them.” The industr!! has yet to comment on what happened to automobile insurance when ridership on public transportation in Califijrnia rose dramatically-128,000 more ridcr-trips daily fbr several weeks on the Bay Area Rapid Transit-after the October 1989 earthquake. The NAII statement clearlv assumes that insurers’ costs would be less if motor& would cut down on car use. It tacitly admits, however, that the industry practice of charging fixed premiums in advance gives the individual motorist no economic incentive to drive less. It is generally recognized that unmetered provision of a good or scrvlce leads to overuse. In 1968, Columbia University Economics Professor William Vickrey concluded “that the manner in which premiums are computed and paid fails miserably to bring home to the automobile user the costs he imposes in a manner that will appropriately influence his decisions.” In the 198Os, the overuse of automobile transportation has prompted increasing concern about its effect on the environment. The search for workable disincentives has focused, for lack of alternatives, on gasoline surcharges, more toll roads, and restriction on car access to cities. In fact, milhons of cars are already driven very little. Of vehicles available to households in the United States, excluding motorcycles, 8% (8.3 million in 1977) are driven less than 1,000 miles annually, and 20% (21 million) are driven less than 3,000 miles per year. On the other hand, while the average mileage for cars is approximately 10,000 miles per vear., about 7 million cars are driven more than 23,000 miles annually. Older cars average fewer miles, and produce fewer insurance claims. However, according to U.S. Department of Transportation data (1977), 1 million newer cars, one to three years old and probably bought for reliability, are also driven very sparingly-less than 1,000 miles in a year.