Reducing our dependence on the private automobile and encouraging alternative forms of transportation are widely recognized as important objectives in maintaining or improving the safety of our streets and the quality of our air. With a public sector regime of automobile insurance in B.C., we have a powerful tool for achieving such public policy objectives. By switching to a pay-by-the-kilometer system from the present pay-by-the-year approach, powerful economic incentives can be created to encourage alternative forms of transportation.
In a pay-by-the-kilometer system there is a marginal cost of insurance for every kilometer you drive. You pay extra if you drive extra. You save money if you drive less. A pay-by-the-year system, on the other hand, imposes a high fixed annual cost of insurance, but no marginal cost depending on the amount driven. Indeed, once you have paid your annual insurance fee, you are virtually encouraged to do unlimited driving: use it or lose it.
To illustrate one approach to pay-by-the-kilometer insurance, consider the following example. Suppose that Owners A and B have similar vehicles and driving records and that their cost for insurance is $800 per 10,000 km, plus a $200 fixed amount per year. Owner A anticipates driving about 20,000 km in the next year and hence purchases 20,000 km worth of insurance for $1800. Driving more heavily than anticipated, however, A uses up the 20,000 km quota within nine months and must renew his or her insurance early. On the other hand, Owner B, who decides to start car-pooling and making frequent use of public transit, anticipates needing only 10,000 km worth of insurance for the year, costing $1000. At the end of the year, B has only driven 9,000 km and is hence entitled to a $80 rebate for the unused 1000 km.
These are, of course, merely simplified examples of how such a system might work; there are many other ways in which a pay-by-the-kilometer system could be achieved. However, the key aspect of a pay-by-the-kilometer system is that it creates a marginal cost for every kilometer driven. Every single decision to drive bears additional insurance cost while every decision not to drive reduces insurance cost. Thus, at any point in time, regardless of past actions, an owner has a further economic incentive not to drive.
With this simple model in mind, then, I invite your to further explore this topic and consider all the following claims for a pay-by-the-kilometer system.
How significant is the disincentive to drive? To get an idea, let's use some ballpark figures for an "average" driver. Under the pay-by-the-year system, let's assume that this driver presently chalks up 15,000 km on the road, pays $1500 in gasoline and maintenance and $1400 in insurance. Under a pay-by-the-year system, the insurance cost is a fixed annual fee and the marginal cost of each kilometer driven is $1500/15000 or 10 cents. This is how much additional our driver would pay for each kilometer driven or how much he'd save by not driving. For example, a two-person carpool on a 40 km trip saves $4.00 by driving one vehicle instead of two. Under a pay-by-the-kilometer system, however, the fixed annual cost of insurance might only be $200, with a marginal cost of $800 per every 10,000 km. Based on 15,000 kms of annual driving, the marginal cost per km is ($1500 + $1200)/15,000 or 18 cents. Now the two-person carpool on a 40 km trip saves $7.20 in vehicle costs, an 80% increase! Thus, under a pay-by-the-kilometer system, the disincentive to drive should be dramatically and effectively increased.
Unfortunately, this dramatic increase in the disincentive to drive will not translate into an equally dramatic reduction in the total amount driven. In economic terms, the demand to drive is relatively inelastic of the cost of driving. In other words, most people consider most of their driving to be a necessity and will not reduce their overall driving much if the price goes up. Even with an 80% increase in the marginal cost of driving, it seems reasonable to expect that typical drivers would only cut back by 10-15% on the amount of driving they do. It should also be noted that the total amount of driving would not be reduced by quite as much, because the lower fixed annual cost of insurance would allow for Good Driving Records are Still Important.
In the present use-classification system in B.C., good driving discounts of up to 40% are available for those with long periods of claims-free driving. A similar program of discounts would also apply under a pay-by-the-kilometer system. The discounts may even be higher because they must be earned by actual performance.
Under pay-by-the-year insurance, good-driving discounts depend on the number of years of claims-free driving. Consider driver A who has driven safely 2000 km per year for 4 years and driver B who has driven safely for 20000 km per year for 2 years (no previous records available for either driver). Driver A qualifies for a 40% discount based on 8000 km of claims-free driving, whereas driver B qualifies for only a 20% discount based on 40000 km of claims-free driving. The discount rates do not reflect the actual driving performance.
In a pay-by-the-kilometer system, it makes sense to base driving discounts on the number of claims-free kilometers driven. If, as one would expect, this measure is more accurate in predicting accident probabilities than the number of claims-free years, it is possible that safe driving discounts beyond 40% would be available to exceptionally safe drivers.
Another very appealing aspect of a pay-by-the-kilometer system is that bad drivers would pay heavily for every kilometer driven. This would create a very strong incentive for bad drivers to drive the minimum amount possible. Under the present system, bad drivers face high annual premiums but may nevertheless decide to buy insurance for the year. Having paid dearly for insurance, however, the bad driver will be strongly motivated to drive as much as possible in order to justify the high price paid for insurance.
The goal of a pay-by-the-kilometer system is to decrease the overall amount driven by increasing the marginal cost of driving. A major benefit of this would be to help reduce our high rate of automobile accidents. In fact, I believe that a reduction in the amount driven would lead to a more than proportional reduction in the accident rate. This is because many accidents occur when two vehicles are crossing paths. For example, if there are 100 cars each travelling in North-South and East-West directions, there are potentially 10,000 path crossings. If, however, the number of cars in each direction is reduced to 90, there would only be 8,100 potential path crossings. Thus a 10% reduction in the number of vehicles travelling at any time would provide almost a 20% reduction in the number of path crossings, and presumably, a 20% reduction in the number of accidents due to path crossings. Although this analysis is quite simplistic, I believe that the "path crossing" phenomenon is an important contributing factor in accident rates. It also helps explain why the increase in automobile traffic in the last few years has been accompanied by a more than proportional increase in automobile accidents and hence fairly large increases in ICBC rates.
Public transit is heavily subsidized in B.C and generally has substantial excess capacity (seats available). If a pay-by-the-kilometer system for car insurance encourages people to use public transit more often, the subsidies for transit may be reduced.
A pay-by-the-kilometer system is more equitable than a pay-by-the-year system. Every kilometer you drive increases your risk of having an accident and ICBC's risk of having to pay for your accident. In a pay-by-the-kilometer system, you pay for each kilometer you drive and hence each increment of risk you voluntarily undertake. In total, each driver pays for the risks of his or her own driving. Conversely, the pay-by-the-year system has the effect of redistributing wealth from those who drive less frequently to those who drive more frequently.
The present pay-by-the-year system of insurance tends to shut out the occasional drivers---ones who would drive only a small number of times per month. With the high fixed-cost of annual insurance, occasional drivers must choose to abandon driving altogether or incur a very high insurance cost for the small amount of driving they want to do.
As a public policy objective, however, we should be encouraging people to rely more on public transit and drive only occasionally. Occasional drivers should not be punished by denying them reasonably priced insurance; they should be encouraged! A pay-by-the-kilometer system of insurance would support this by substantially lowering the fixed annual insurance costs and allowing people to pay for actual kilometers driven on an incremental basis.
Another advantage of the pay-by-the-kilometer system is that it eliminates an inherent injustice due to the arbitrary boundaries that exist in the use classification system. An arbitrary boundaries, for example, is a policy that would allow you to drive your car 6 days per month to work or school under the pleasure-use only category, but not 7 days.
How would you feel if you used your car for commuting 7 days per month and hence had to pay a considerably higher insurance rate than those who commute only 6 days per month? What if your commute was quite short and you considered that your 7 days of commuting involved much less driving than the typical 6 day-a-month commuter? Unfortunately, many people would feel cheated by an unfair system and would feel justified in cheating the system in return.
A similar arbitrary boundary in the present system is the discount given for being less than 15 km away from your place of work. How is it fair that someone living 16 km away from work and commuting only three days a week is asked to pay more than someone living 14 km from work but commuting 5 days a week?
In a pay-by-the-kilometer system, there is no need for a use classification system and the problems it entails. People who drive for pleasure only would presumably pay less than average for insurance because they drive fewer kilometers than average. Full-time business use would require larger insurance payments proportional to the greater distance driven.
In addition to its other virtues, a pay-by-the-kilometer system should also encourage people to drive more fuel-efficient vehicles. The present system of insurance imposes a relatively high cost for each vehicle owned. If it weren't for the insurance costs, many people would choose to own and drive two vehicles: a small, fuel-efficient car for commuting and a second vehicle such as a truck or van for occasionally hauling loads or a luxury automobile for driving vacations. However, the present system discourages this and instead encourages people to own and drive a single "compromise" vehicle---one which can be used both for daily commuting and for other tasks. On the surface of it, this has the apparently desirable effect of minimizing the number of vehicles in circulation. Unfortunately, it means that large numbers of fuel-inefficient vehicles are being used for daily commuting.
This issue really involves a trade-off. Moving to a pay-by-the-kilometer system should increase the use of fuel-efficient vehicles, but will also increase the total number of vehicles being driven. The environmental impact of a shift to more fuel-efficient vehicles should be significant and positive. The most fuel-efficient vehicles consume gasoline at rates below 5 liters per 100 km, while "compromise" vehicles may consume gasoline at 15 liters per 100 km or higher. I assume that a three-fold decrease in the amount of gasoline consumed should produce a concomitant reduction in the amount of pollutants produced. Of course, I would not expect a three-fold improvement on average, but it does indicate the potential for improvement that exists.
The negative effect of the pay-by-the-kilometer system is that it would increase the total number of vehicles insured. But this does not necessarily mean that the total amount of driving increases significantly. Even if you own two vehicles rather than one, you can't drive them both at the same time! Furthermore, I believe that the effect of having an increased number of vehicles insured should be more than offset by the general disincentive to drive provided by a pay-by-the-kilometer system. It is premature to conclude that this particular issue resolves definitely in favor of the pay-by-the-kilometer system, however; a more detailed study would be necessary to evaluate the trade-offs properly.
Because of the inherent fairness of paying insurance premiums for the actual kilometers of driving risk undertaken, and the lack of arbitrary, unfair boundaries as in the use classification system, one should expect that a pay-by-the-kilometer system becomes more respected than the present pay-by-the-year system and that the tendency to cheat the system is reduced. Nevertheless, good enforcement should be in place to keep cheating to a minimum.
Enforcement of a pay-by-the-kilometer insurance would be based on odometer readings recorded at the time of initial insurance purchase and subject to various checks at other times. Random odometer checks may take place at insurance renewal and/or aircare inspection. Police officers may check odometers for proof of insurance at roadblocks or when issuing traffic citations. Automobile service shops may be required to report uninsured vehicles based on odometer readings.
Attempts to cheat a pay-by-the-kilometer system could be made by buying insurance only for a small number of kilometers at the start of the year and then winding the odometer back throughout the year or disconnecting the odometer/speedometer altogether. Disconnection seems the less likely strategy as it would be highly visible to passengers. On the other hand, winding the odometer back would be frequently required to ensure that it always stays within the insured range. Cheaters are likely to become sloppy, allowing the odometer to read out of the insured range at times and subjecting themselves to detection by random checks.
An additional strong deterrent to odometer tampering is that evidence of the tampering---especially repeated tampering---should become quite apparent in the forensic investigation of any major accident. Furthermore, there will be many other types of evidence that will show up large-scale discrepancies in the number of kilometers driven versus the number of kilometers insured.
Another mode of cheating may be to roll back the odometer by a large amount just before insurance renewal in order to claim a large rebate. It seems logical to minimize this by allowing, say, a maximum 20% rebate at the end of the year (with higher prorated rebates possible during the year).
Other enforcement mechanisms are possible, including the possiblity of installing tamperproof inertial-motion monitoring equipment on suspect vehicles.
An alternative proposal for creating economic disincentives to drive is to place a tax on fuel to pay for automobile insurance. However, it has several major flaws:
Note that, on the issue of "taxing" fuel consumption, the pay-by-the-kilometer approach lies somewhere between the opposite extremes represented by the present pay-by-the-year system and the fuel tax proposal.
From the narrow perspective of insurance company executives, the introduction of pay-by-the-kilometer is likely to be considered too radical a departure from the present pay-by-the-year system based on use classification. Public opposition to the proposal would also come from those whose insurance costs would rise due to the high amount of driving they do. However, the negative public reaction should be muted by several factors: the inherent fairness of the system, the possibility for high-kilometerage drivers to reduce costs with a second "commuting" vehicle, the fact that costs rise most dramatically for bad drivers unless they cut back on their driving, and the recognition of the overriding environmental and quality-of-life objectives behind the system.