Distance-based vehicle insurance - A practical strategy for more optimal vehicle pricing

Automobile insurance premiums are currently a fixed cost with regard to annual vehicle mileage. Distance-based insurance would be more equitable and economically efficient, providing a number of specific benefits including increased road safety, reduced traffic congestion and pollution, road and parking facility cost savings, insurance affordability, and increased consumer welfare. This paper discusses different distance-based pricing strategies, and evaluates the benefits that would result from their implementation. Per-Mile Premiums is found to provide the greatest benefits. This means that the exposure unit is changed from the vehicle-year to the vehicle-mile or -kilometer. Other rating factors are incorporated into this price unit, so higher-risk vehicles are charged more per mile than lower-risk vehicles. This strategy requires "odometer audits" to provide accurate mileage data. The incremental cost of such audits is estimated to be about $7.50 per vehicle year. Total benefits are predicted to be many times greater.