Automobile Insurance Pricing: Operating Cost versus Ownership Cost; the Implications for Women

This paper assesses the ability of automobile insurance prices to distinguish the 2:1 ratio of men's to women's annual mileage, which is linked to a similar ratio of accident involvement per year. Review of current price classes by driver sex and age, by future mileage, and by past driver record reveals severe limitations to their capacity to assess women's lower mileage exposure to risk of accidents. Accidents are modeled as a process of random sampling of vehicle miles traveled (VMT) by cars in an insurance class. This analogy underscores 1) the impossibility of pricing by individual accident record and 2) the paramount importance of odometer-measured vehicle miles of on-the-road exposure for assessing individual accident risk in money terms. The need for risk classification as the essential complement to exposure measurement is shown by considering how a single insurance surcharge on gasoline ("pay at the pump" insurance) as an exposure measure would perversely affect incentives for risk control. Current risk classification is profoundly compromised because individual exposure is not measured. An efficient per-mile premium system combining exposure measurement and risk classification is described. Current flat premiums are compared to premiums that would increase in direct proportion to miles of driving exposure. This comparison shows how individuals, and also women and men as groups, would be affected by changing insurance from a fixed cost of car ownership to a per-mile operating cost of car use.