Imagine if state law made it difficult for pizza joints to sell by the slice. You’d have to buy and eat a lot of pizza when you got a hankering. Either that, or you’d have to give up pizza entirely. By-the-slice pizza lets light eaters save money.
The car insurance market today is like an alternate reality where no pizza joints sell by the slice. You have to buy a lot of insurance, even if you only drive a little, or you have to give up driving. If you’re poor, you may drive illegally without insurance.
The equivalent of by-the-slice pizza is by-the-mile auto insurance. It gives families a new way to save money, by driving less. It also lets low-income drivers buy just a little insurance. It gives consumers more choices. And it creates a gentle, money-saving incentive to find alternatives to driving alone. This incentive yields fewer car crashes, less consumption of imported gasoline, less congestion, and less air pollution.
Extensive actuarial research now demonstrates that the number of miles driven is a strong predictor of crash risk. Actuarial accuracy—that is, aligning risk profiles with premiums—is the Holy Grail of insurance regulation and of insurance profitability. For this reason alone, highly placed insurance executives have confided that they believe by-the-mile insurance will eventually sweep the market. One executive said, “Once some company figures this out and starts doing it, we’ll all have to do it.”
For the Northwest, hastening the arrival of this development is an enormous opportunity, because of the many shared benefits of by-the-mile insurance. What other market-driven innovation prevents crashes, congestion, and pollution; conserves energy; helps the poor; and gives families a new way to save money?
The main barrier to by-the-mile insurance is the business challenge. Cost-effectively tracking and charging for auto insurance on the basis of miles actually driven is hard, and insurers are competing furiously to rise to this challenge. About a dozen insurers around the world have now introduced mileage-based insurance plans, either in pilot form or as regular products. None of them has ignored traditional rating factors, such as age and driving record. They just track mileage much more assiduously than is the norm today.
Another barrier is legal and regulatory. Because insurance laws and rules were written on the then-reasonable assumption that all insurance would be sold by the year, rather than by the mile, existing regulations make by-the-mile insurance cumbersome to win approval for. In the bygone days when odometers were mechanical and easy to tamper with, and when drivers could not snap a photo of their odometer with their cell phone and send it in a text message to their insurance company, by-the-mile insurance was not a live possibility. Nowadays, it is.
A bill that nearly passed the Washington legislature in 2011 would have re-edited relevant statutes to explicitly permit selling coverage by the mile. The same bill also attempted to remove two other impediments to this innovative and money-saving insurance approach, although different proponents of reform from industry, consumer groups, civil liberties watchdogs, and conservation organizations did not reach agreement on the best specific solution in time to win legislative approval.
The first obstacle is an obscure consumer protection provision in state insurance law, which requires that insurers provide written notice of a policy’s imminent cancellation 20 days before its expiration. That’s a reasonable rule, but it’s unworkable for some approaches to by-the-mile insurance. If an insurer’s mileage-based product sells coverage in blocks of 1,000 miles (much as a cell-phone company might sell blocks of minutes), the insurer would not know when its customers are 20 days from running out of miles. Making sustainability legal requires greater flexibility.
The second obstacle is Washington’s high bar for public disclosure. The state requires insurers to file as public record with the Office of the Insurance Commissioner (OIC) detailed data on the structure of their pricing and its empirical justification. Developing a new insurance product, such as a by-the-mile auto insurance policy, can require an investment measured in the hundreds of thousands or millions of dollars. Yet much of this information must be made public before the product can even be marketed. And who are the most-frequent visitors to the OIC’s shelves of public filings? Other insurers. Competitors. What if pizza joints had to publish each of their pie recipes before they could turn on their ovens? That’s essentially the position insurers are in.
In times past, consumers had few tools for interpreting the arcana of insurance policies, so careful public review by state regulators was essential. Nowadays, instant online access to the expertise and ratings of citizens far and wide give consumers more market power than before. We can afford a less-onerous public disclosure rule, if it will speed innovation. For example, Olympia could require filing new products and their empirical justification with the insurance commissioner but not require sharing them publicly for two years.
Oregon and Idaho’s insurance regulations are somewhat less laden with outdated rules than Washington’s, and British Columbia has near-perfect conditions for introducing by-the-mile insurance. The Insurance Corporation of British Columbia writes 90 percent of the province’s auto insurance policies, and faces few of the competitive pressures of US insurers.
Removing the barriers to pay-as-you-drive insurance would speed the rise of this money-saving innovation. The sustainability benefits would be huge. Widespread adoption in British Columbia would likely trim more than 11 percent of personal driving in the province, according to Todd Litman of the Victoria Transport Policy Institute, one of the world’s leading thinkers on by-the-mile auto insurance.
Besides, allowing the sale of insurance by the mile is common sense: It’s just like allowing the sale of pizza by the slice.
Sightline’s Making Sustainability Legal project identifies specific regulatory barriers to affordable, green solutions. If you’ve come across such an obstacle, please let us know by writing Eric (at) Sightline (dot) org.