The Premium Structure . . . Promot[es] Excessive Use of a Given Stock of Cars and Undue Stinting on the Ownership of Cars—William Vickrey (1968):

This essay revisits William Vickrey’s 1968 critique of automobile insurance. Absence of response to his powerful criticisms effectively denied their truth, but economists are now reacting to one of them: charging for insurance as an expense of car ownership fails to internalize the accident costs of using a car. Therefore recent studies recommend converting the premium unit from car-year to odometer-mile. However, based on other criticisms by Vickrey this essay makes a case for some car owners to insist that insurers immediately offer the odometer-mile unit as an option. Both “stinting on ownership” and “excessive use” of cars, which car-year premiums promote, are in fact adverse selections. To reduce fixed insurance expense, owners selectively remove cars used less than average from insurance pools and increase the use of cars kept insured. Stinting-on-ownership is confirmed by negative effects of premiums on ownership. Excessive-use-of-cars is shown by more claims per 100 car years produced by the cars of low-credit-score owners. And no justification is found for frequent assertions that premiums incentivize less car use. Non-response of individual premiums to car use is shown by insurers’ stated need to raise all premiums when a drop in gasoline prices induces greater car use by some owners. One consequence of the adverse selections appears in every locality as large ranges in premiums charged for cars identically classified but distinguishable by owner financial status. Because the premium structure incentivizes using fewer cars more intensively, competition through selective underwriting means high premiums for owners on tight budgets. Therefore owners giving up cars only to face still higher premiums have principled economic justification for demanding premiums proportioned to car use instead of ownership. † Insurance Project Director, National Organization for Women Foundation, 1100 H Street, NW, 3 Floor, Washington, DC 20005, 202-628-8669, x148, [email protected]