Time for “Pay As You Drive” Insurance

Steven Levitt and Stephen Dubner, authors of of the best-seller “Freakonomics,” have applied economic reasoning to all manner of social and public policy issues, from crime to drugs, parenting to sumo wrestling. Now they have turned their sights upon transportation.

“Americans drive too much,” Levitt and Dubner proclaim on their blog. “This isn’t a political or moral argument; it’s an economic one.”

The cost to motorists of driving does not incorporate significant externalities, such as traffic congestion, carbon emissions and traffic accidents. While Global Warming and greenhouses gases get all the attention these days, the social cost of CO2 emissions amounts to a modest $20 billion yearly in the United States, the authors say. Congestion costs significantly more: $78 billion a year. But the biggy is traffic accidents, which runs up the tab by $220 billion a year.

The authors are big fans of congestion tolls, which allocate scarce roadway capacity, as well as the gasoline tax. (Gee, they sound just like Bacon’s Rebellion!) But they acknowledge that “political hysterics” are not conducive to either solution. But there may be a way to rationally allocate the costs of driving by reforming the market for automobile insurance, Levitt and Dubner suggest.

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.

Crediting other economists for the idea, Levitt and Dubner advocate “Pay As You Drive” insurance: All other things being equal, the more miles you drive, the greater risk you have of getting into an accident, and the more insurance you should pay.

PAYD insurance programs are entering the marketplace but it is too early to determine if insurance companies like Progressive Insurance will make money. If all they do is give discounts to their own low-mileage customers while their high-mileage customers seek cheaper insurance elsewhere, they’ll lose business. On the other hand, such policies may succeed in luring low-mileage customers from other insurers. Society has a vested interest in seeing PAYD succeed. Write Levitt and Dubner:

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.

Insurance is regulated by state government. The General Assembly should take the lead in studying the feasibility of introducing PAYD insurance in Virginia. Politically, PAYD should be less controversial than tolls and gasoline taxes — it’s hard to make the argument with a straight face that people who drive more shouldn’t also pay more insurance — so we can hope that legislators might be willing to tackle it.

All things considered, PAYD is one of the best ideas I’ve heard in a long time. (Hat tip to Jonathan Mallard for pointing me to the Freakonomics blog.)

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  1. E M Risse Avatar
    E M Risse

    Some contrarian thoughts and the bottom line:

    Insurance Enterprises have everything to lose in the short run — lower profit.

    Fewer miles driven mean different driver habbits and thus fewer cars as well as older and cheaper cars.

    Watch pandering politicians jump in to help pay insurance costs.

    If the cost of accidents was a problem for insurance Enterprises then they would have done more (including this) already.

    Winner-Take-All competition will push premiumns lower dampening any rate impact.

    Bottom line: On the other hand, anything that starts society on the path to paying a fair price for location-variable costs is a good thing…

    … if it is not seen as a “solution” and thus results in Fundamental Change in human settlemetn patterns and in governace structure coming too late to salvage civilization as we have known it and as it could have been sustained.


  2. Anonymous Avatar

    Only part of your insurance risk is dependent on how much you drive, much is dependent on where you drive, how you drive, what you drive, and even where you park. As long as only part of the charge is distance based, this might be a good idea.

    The same thing holds for charging drivers an mileage tax or other tolling system: only part of the costs and benefits of the highway system depend on the miles driven. For example, if a highway is designated as a hurricane exit route with ramp control, signs, etc., then those costs are not legitimate to charge only to the daily commuters. Likewise, we advocate charging developers for new infrastructure or increased usage of existing infrastructure so those revenues or costs should not be billed to the everyday user.

    One insurance company ran a test using a GPS based system which charged you by mileage and for driving in the bad parts of town, etc.

    Some auto rental companies use GPS to determine if yu have left the state or speeded withthe car, which can trigger high additional charges to you rental bill.

    Otherwise, EMR is right. Most stuff costs pretty much what it costs. Like the North Carolina water users who sucessfully lowered their water usage, only to see the rates go up.


  3. Anonymous Avatar

    What I ‘d like to see is insurance and tags taht are transferrable. I have several farm trucks, each with a specific use that are seldom used, but all have insurance, and tags. It is really pretty silly to duplicate all that, as long as one is in use at a time.


  4. Anonymous Avatar

    What the heck, if reducing the amount of driving is the object, $4.00+ a gallon gasoline will do quite nicely in the short run.

    An added bonus is it doesn’t take a book or a long post to figure it out!

  5. Accurate Avatar

    EMR actually didn’t agree on something that would (possibly) reduce the use of the automobile??? Bring the paddles, my heart can’t take it.

    I dislike this idea – as someone who travels in excess of 30,000 miles a year for work (As a building inspector I have to go job site to job site); and as someone who has not had an accident in over 30 years and no tickets in over 20 years the last thing I want is to be ‘fined’ because of what I do, rather than my driving.

    In Oregon they are trying to institute a GPS so that you would pay a gas tax based on how many miles you drive rather than a tax on how many gallons you buy. Just one of the many objections has been mentioned by a previous commenter – what is to stop big brother from tracking where you drive, what speeds, what time of the day, etc. etc. – no the government is already far too intrusive in my life I don’t need to hand it even more information on me. Our taxes paid for the roads, our taxes are supposed to be used to repair the roads. If a private company wishes to buy the land and put in a private toll road, go ahead – but I don’t need or want any more ways for the government to keep tabs on me. The only reason Orwell didn’t include stuff like this in Big Brother is because his imagination couldn’t quite fathom it. To me, Big Brother is far too close to a reality and I’d rather minimize it rather than maximize it.

  6. Once again, why the Big Brother approach of spying on everyone’s driving habits? I’ll just quote myself:

    Every driver already pays according to the number of miles driven. Drive 20,000 miles a year and you will need to change your oil, tires, brakes and other wear items proportionately more often than the guy who drives 2,000 miles a year. The gas tax likewise imposes a proportional cost. If your extra driving results in an accident, guess what? Your insurance rate goes up. Insurance companies always get their pound of flesh one way or the other.

    So it’s surprising to find an economist buy into pay-per-mile. It’s an absurdly expensive way to collect money because it requires a massive surveillance infrastructure to make it work. Unless you’re an investment banker, Patriot Act fan or an employee of one of the many tolling firms out there, I don’t see the attraction.

    Second, congestion is hardly something that I don’t pay for. I pay for it every day on the freeway. This cost is imposed not by drivers, but by politicians who instead of using motorist funds to build more roads lavish it on the nearly empty buses that serve 2% of the population.

    There are lots of problems with the insurance system, but a real conservative would point the finger at the biggest culprit in raising costs: trial lawyers. Absurd pain & suffering payouts drive up the cost for everyone. But why address that when you can come up with a ridiculously complex system that ends up charging everyone but those wealthy enough to live close to work the same or more?

  7. Anonymous Avatar

    I like the idea of making travel costs more apparent, given the amount of environmental damage created by wanton travel. However I am concerned this is fullfilling the paranoid? predictions for Bush’s New World/Amerikan travel restrictions.

  8. Jim Bacon Avatar
    Jim Bacon

    so much for being a political no brainer. I’ve also identified another problem. One in seven drivers does not have insurance. This plan would do nothing to deter them from driving.

  9. Spank That Donkey Avatar
    Spank That Donkey

    Excuse me Mr Bacon, but I emailed you about the effects of HB 172 passing this year in the General Assembly, and that didn’t seem to phase you.

    HB 172 is going to allow the Trial Attorney’s free looks at anyone’s Personal Automobile Liability limits, BEFORE a law suit is brought.

    That is going to increase auto insurance premiums, as your policy limits should have no bearing on what your actual damages are.

    I am curious as to why you would ignore something quite as simple, as invasion of one’s privacy number one, and an obvious boon to the Trial Attorney’s that will only increase everyone’s insurance premiums.


  10. Anonymous Avatar

    I am a progressive customer and here are the details on the plan

    You get a 5% discount just for signing up for the program

    You get roughly an extra 1% discount for every 1,000 miles you drive below 12,000 annually

    I drive about 11,000 annually so I end up with a 6% discount.


  11. Jim Bacon Avatar
    Jim Bacon

    NoVa Middle Man, That doesn’t sound like much of an inducement. Cut your driving 1,000 miles a year and save 1 percent on your insurance — maybe $10? Nah, that won’t work.

    Spank that Donkey, I remember your email regarding HB 172 and I’m sorry if I was too preoccupied at the time to follow up. I regard with suspicion anything that helps plaintiff’s attorneys extort more money from insurance companies (which means that they’re extorting it indirectly from you and me). I’m surprised that the House of Delegates passed the bill — do you know the inside story?

    But I’m not clear how HB 172 would effect Pay As You Drive insurance. What’s the connection you’re making?

  12. Anonymous Avatar

    Automakers See Chance to Go Big in China

    Growing Prosperity Fuels a Surging Demand for SUVs and Luxury Sedans

  13. Anonymous Avatar

    Wow, 11,000 miles.

    I drive the tractor that far without leaving the farm.


  14. Anonymous Avatar

    Anonymouw 9:47 has it figured out. That will do the job nicely.

    What it doesn’t do is let some people figure out an excuse to only sock it to the others.


  15. Larry Gross Avatar
    Larry Gross

    I don’t think people should be punished for driving.

    People SHOULD pay their legitimate costs of driving.

    It appears that where this comes from is that there is a feeling that we have explicit and implicit subsidies for driving and that because of that people drive more than they “should” and from there we advocate policies to get around the subsidies by overt policies to penalize driving.

    Your insurance policy that comes mostly from the private sector and not the government thank goodness already factors in mileage as well as a bunch of other factors that trade off risk verses costs associated with risk.

    this approach walks and talks like the abuser fees ….

    let’s not have government screw up yet another thing…they have no business doing…

  16. Anonymous Avatar


    Larry does see the difference between punishment for activity some disfavor, and paying legitimate and externalized costs.

    Now all we have to do is figure out what they are. How much of the implicit and explicit subsidies are real, how much are urban legend, and how much are worth bothering with.


  17. Groveton Avatar

    “It also means that low-mileage drivers like Zelda subsidize high-mileage drivers like Arthur.”.

    I went to the grocery store the other day. I bought three items. The man behind me bought six. I noticed that the cashier spent almost as much time checking me out as he spent checking out the man behind me. I was subsidized!

    I got my ticket for a flight from the airline ticket counter. I asked the agent about the weather in Tokyo. The woman in front of me did not ask about the weather. I got subsidized.

    I checked into the hotel. I used the hotel’s pen to sign my full, long name. The man next to me also used the hotel’s pen but has a much shorter name. I got subsidized.

    Where does this end?

    It’s not the number of miles you drive, it’s the number of accidents you have.

    I had a chance to finish Supercapitalism on the flight to Japan. I can’t quite sanctify Robert Reich as some others seem wont to do. In fact, Mr. Reich seems to be quite a fan of subsidies. On pp 161 – 162 Mr. Reich discusses the efforts by phone companies to provide video programming to homes (in competition with cable companies). “Almost entirely overlooked were basic issues of accountability and fairness, and concerns about the community. If phone companies rather than cable companies provided the video, the fees that cable companies now turn over to towns and cities will evaporate. That means that property taxes or other fees would have to be raised for all homeowners to replace them.”.

    So, people who buy cable TV are subsidizing those who don’t?

    There sure are a lot of subsidies in the world.

  18. Spank That Donkey Avatar
    Spank That Donkey

    Mr Bacon:
    The inside scoop was that it passed the house 63-33 or so, where Conservatives still opposed it.

    It went to the Senate, where Senator Chichester apparently used to deep six this proposal each year. Without him, the insurance companies knew it would pass so they opted to amend the bill to have a threshold of $12,500.

    When you or your trial attorney contacts your claims adjuster, that adjuster must by law reveal your policy limits to the prospective plaintiff.

    So you accidentally rear end someone, they get in the ambulance go to the hospital and the next day, they are sizing you up for a nice, big, fat, juicy law suit.

    Follow the links in my post to how much money Tim Kaine, Terry Kilgore, etc have been taking from the Trial Lawyer Lobby.

    Virginia is 41rst in auto insurance premiums because the Trial Lawyers were not able to pull this kind of BS on citizens.

    By one act of the General Assembly and a compliant Governor who took in $383,000 from the Trial Lawyer Lobby alone, our rates will be going up. Another hidden inflation due to Fat Cat special interests in the General Assembly.

    The relationship to pay as you go, is that I being an insurance agent, I know that length of commute is already factored into the premium matrix by the actuaries who develop the rates.

    Companies operating in the free market will experiment from time to time on how to come up with the rates, but here is the bottom line.

    Almost every property and casualty insurance company pays out 100% of the premiums it brings in each year. They make money on the ‘float’, i.e. how much time they can keep that money in the bank until it is paid out in a claim.

    If a P&C carrier has a terrific year and post say a 95% combined ratio, that means they also had a 5% underwriting profit, i.e. got lucky or their underwriting guidelines produced a profit.

    VA is an awesome state for auto, home and commercial P&C products, we need to keep it that way! But pay as you drive will be experimented with only if it is profitable, my assumption is, don’t count on it.

  19. Larry Gross Avatar
    Larry Gross

    there ARE lots of subsidies in the world.

    and yes… “user pays” for every single transaction where the cost of the transaction is a separate item and the cost of the transaction varies might seem to be “too far” but this already happens..

    For instance, it used to be that a repair call often consisted of the time, labor and parts and now there is a “minimum” charge to cover the transaction itself.

    Want a paper airline ticket generated on the airline’s paper?

    Every product you buy at the store has a built-in transaction fee that.. does.. indeed.. mean that the more items you buy.. the more you pay that “little” transaction fee.

    your scenario with the checkout does not “work”.

    That person is paid by the hour and you can bet every item sold has an allocated transaction cost associated with it.

    The more items you buy – the more you pay in transaction fees.

  20. Anonymous Avatar

    “an allocated transaction cost associated with it.”

    Yes, but it is allocated, not charged separately.

    I think you just beat up on your own argument.

    If it was charged separately, then you would get charged more if you fumble in your bag for 10 minutes to finde your wallet, and then another 10 minutes to find your coupons. And, you would be charged more if yu had an unskilled or slow checkout person vs a fast one.
    You’d be charged more to load your goods, if you needed help.

    And on top of that, then you would hae topay for allthe infrastructure and supervisors to keep track of what all the charges should be.

    Sometimes, it’s more efficient and maybe even more fair, to just allocate costs.

  21. Groveton Avatar

    Anon 2:38


  22. Jim Bacon Avatar
    Jim Bacon

    Donkey Spanker, That’s a fascinating story. Where was the insurance industry lobby when all of this was transpiring? I guess your industry will have to learn to pony up and contribute more to the politicians!

    On the serious side, I would invite you to submit a column describing the genesis of the legislation, and its impact, for publication in the Bacon’s Rebellion e-zine, which (hopefully) would generate some discussion on this blog.

  23. Larry Gross Avatar
    Larry Gross

    re: subsidies

    here is an example of how some folks essentially “game” the system.. using more than their intended “share” and then action has to be taken to more directly allocate costs – essentially because there are folks who are greedy and will take more than they are entitled unless you rein them in:

    “The TSP became concerned last year about frequent trading, saying that a relatively small number of government employees were driving up the plan’s transaction costs and diluting returns for other participants.”

    ….””The view that exceptional costs generated by 1 percent of participants should be viewed as inconsequential if they can be charged off to 100 percent of plan participants is troubling,” the rule said. Costs “can be very high depending on how funds are invested on a particular day.”

    …”But the TSP rejected that argument. For example, on Aug. 16, 2007, the actions of frequent traders helped drive up transaction costs for the TSP’s international stock fund to $9.5 million — an amount that was absorbed by all investors in that fund, the rule said.”


    and here’s how this often plays out.

    They change the rules and the greedy will either find another loophole or they will shout bloody murder than their “rights” are being violated….

    It’s these kind of folks that ruin it for everyone else.. drive up overall costs and cause more restrictive rules to be put in place.

    These are the same kind of folks that will drive SOLO at rush hour every day and demand that taxes be raised on everyone to pay for more capacity and rail against the idea that those costs would be allocated to them directly.

    Ditto for peak hour electricity.

    Always those that want more.. they want to consume more.. but they want that consumption essentially subsidized by others…

  24. Groveton Avatar


    I am going to take a chance here and bet that you believe in a “woman’s right to choose”. I use quotes because I want to examine those words carefully. If a woman has the right to choose whether or not to carry a pregnancy through to childbirth then the resultant child must be considered the woman’s choice – no? If the child is a choice then why should people who did not participate in that choice have to subsidize the costs of that choice? You get upset when others (supposedly) subsidize the choice of some people to drive solo at rush hour. You think that’s unfair. Why is it fair to ask people to subsidize a woman’s right to choose (i.e. a child)? I guess you are going to tell me that educating children is a special case of societal need regarldess of whether the child was a choice. You’ll say something about education costing less than prison. But roads make employment more fungible. If there are adequate roads then people can go to any number of jobs by just driving to those jobs. Therefore, employers have to pay more and provide better benefits than they would have to provide if the roads weren’t there providing “employment liquidity”. To understand this all you have to do is to look at the “company towns” of yesteryear. Locked to a single employer the employee suffered greatly. Roads provide “employment liquidity”. Therefore, they drive up the wages paid to employees by employers by increasing employee choice. Higher wages are, in an of themselves, a goal of society. In addition, higher wages generate higher tax receipts which benefit everybody.

    So, you say subsidy and I say investment.

    Why am I wrong?

    Important health warning – I made every effort not to take a position on the abortion vs. woman’s choice issue. I simply asked why the choice of having a child should be subsidized while the choice of driving to work should not.

  25. Jim Bacon Avatar
    Jim Bacon

    Groveton, That’s an interesting way of looking at roads: By increasing choices of where to work, roads provide “employment liquidity.” It’s a fancy, high-blown concept that only an economist would use — I like it!

    Of course, other transportation modes provide access to work and create “employment liquidity” as well, though perhaps to a lesser degree with current human settlement patterns.

    But it’s an interesting perspective for examining the value of roads and other transportation modes.

  26. Groveton Avatar

    I had to dream up something to say to Larry!

  27. Anonymous Avatar

    I think Groveton is right here.

    Larry does have a point in the case where a few users cause extreme increases in costs, but it is easy to get inot silly mode by demanding accountability that raises transction costs too much.

    Which is exactly larry’s point about the TSP. A few users want extreme accountability; the ability to jigger their investments constantly, and this raises the costs for everyone else.

    Toll roads could esily do the same thing, and so could peak electricity pricing.

    Larry want’ the ability to Jigger charges for his use of the roads (which he apparently doesn;t use much) but this ability is likely to cause other users more.

    IF that happens, (IF, Larry, IF) then other people would be subsidizing Larry’s ability to avoid costs.

    User pays for every transaction is not always a guarantee of lower costs over all.


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