HOW A NEW AUTO INSURANCE LAW COULD EASE OUR DEPENDENCE ON OIL, BY GIVING DRIVERS A CHOICE

By AARON S. EDLIN

Thursday, Jan. 17, 2002

The war on terrorism has caused many to focus on America's dependence on foreign oil, given that some Middle Eastern countries harbor and, in some cases, even sponsor terrorists. The Clinton Administration sought to produce super high mileage cars in the medium term. However, the Bush Administration has scrapped that project in favor of a fuel cell research project that could power cars without oil in the longer term.

Research on energy efficient cars is all to the good, but surprisingly dramatic reductions in energy consumption are possible in the much nearer term, without replacing our fleet of cars. Rather, what we need is for Americans to reduce the over 2,300,000,000,000 miles they drive each year.

Cheaper Insurance For Those Who Drive Less

New legislation in Texas illustrates one way drivers can be incentivized to drive less. As of January 1 of this year, insurance companies have been able to offer Texas car owners an alternative to paying insurance premiums in fixed installments at a dollars-per-year rate. Now drivers have the option of instead buying insurance protection on a cents-per-miles-driven basis - in much the same way that they buy gasoline. The less they drive, the less they pay for insurance.

So far, cents-per-mile policies are not yet widely available, even in Texas. But consider what would happen if they were widely available, and if a significant number of drivers opted for cents-per-mile coverage.

Under current insurance plans, a driver will generally pay more or less the same whether he drives 18,000 or 3000 miles per year. (If he reports a high mileage truthfully, and many drivers don't, he may pay somewhat more, but nowhere near 6 times as much.) Of course, that incentivizes the driver to drive as much as he or she likes.

It is as if one could belong to a "gasoline club" in which one bought a membership at the beginning of the year and never had to pay for gas again. Such a club would provide no incentive to conserve gas; indeed, it would create an incentive to waste it.

The Benefits of Cents-Per-Mile Insurance

With a cents-per-mile insurance option, most drivers would choose to drive somewhat less and many would drive substantially less. That would mean, in turn, that America would reduce its dependence on foreign oil, and oil generally. Accident costs injuries and fatalities should decline, and congestion and pollution would also be reduced.

A cents-per-mile system would also be fairer. Advocates of the new Texas law have emphasized that under such a system, poor people who currently drive without insurance could afford to purchase it. Poor people tend to drive fewer miles per year anyway, and thus end up subsidizing the rich, who drive more, with their insurance premiums. A cents-per-mile system would both end this regressive subsidy, and allow the poor to decrease their insurance premiums by driving selectively - taking the subway or bus sometimes, or walking to work, so that their insurance remains affordable.

My own estimates show large potential benefits if all drivers in Texas were to switch to per-mile insurance premiums. Texans would choose to drive 7.5% fewer miles and save $400 million per year on insurance, even after subtracting the lost benefits from reduced driving. If all U.S. drivers switched to per-mile premiums, the corresponding figure would be $8.4 billion.

If we add in the value of time savings from reduced congestion, a conservative estimate is that overall U.S. savings from per-mile insurance would be over $16 billion annually. In addition, thousands fewer people would die each year in motor vehicle accidents, since driving will be reduced. (Drunk bus or subway-riding, thankfully, is not a hazard, nor is drunk walking).

While working at the White House for Clinton's Council of Economic Advisers, I proposed amending Dick Armey's no fault insurance bill to allow people to choose to buy insurance by the mile. The President ruled that the matter required more study. Hopefully, President Bush will act on the matter, and encourage the country to follow his own state's lead.

Car Insurance and Gender Equity

At about the same time I proposed amending Armey's bill, Patrick Butler, who had long advocated per mile premiums, got the National Organization for Women (NOW) to create and endorse a model bill that would give people the choice of buying insurance by the mile. (NOW also has posted on the Internet an explanation of cents-per-mile). Butler and NOW have played an important role in the new Texas initiative.

Women buy roughly half of auto insurance, and after age 25 or so, they pay similar insurance premiums to men. That is unfair, since women get into only roughly half the accidents men do, and drive half as many miles. As a result, insurance payments come in from women's wallets, but they go out to men's. Cents-per-mile premiums would accordingly be a boon to women, saving them a great deal of unfairly imposed cost.

Better Technology to Monitor Miles Driven

Won't cents-per-mile insurance just lead to lots of turned-back odometers? Not necessarily. GPS technology in cars can reliably monitor miles driven; accordingly, one insurance company has used it to implement a cents-per-mile plan.

The only flaw in the Texas legislation is that while it allows insurance companies to offer per-mile premiums, it does not require them to do so - and few have so far. Perhaps the law should turn this new option into a new requirement. Then Americans could save on insurance costs by driving less. At the same time, they would reduce America's oil addiction, and so give the U.S. better options in its war on terrorism.

It is about time that more insurance companies - nationwide, not just in Texas, begin offering auto insurance by the mile. The benefits are both large and legion.


Aaron Edlin is a professor of economics and law at UC Berkeley, where he has taught since 1993. He worked for the Clinton Administration as a Senior Economist at the Council of Economic Advisers, covering industrial organization, regulation and antitrust in 1997-98, and has been a visiting professor and research scholar at Columbia, Stanford, and Yale law schools. He received his A.B. from Princeton and his Ph.D. and J.D. from Stanford. Edlin has also written a longer paper on the benefits of per-mile premiums, which is available on the Internet.

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