Reverse Adverse Selection

Interesting article in Freakonomics on "pay as you drive insurance". In the case of health insurance, those people who most need insurance are most likely to pay for it, while young healthy people are not. This adverse selection pushes up the price of insurance for those that have it (and is one advantage of a government mandated system or government provision). In this car insurance example, people who drive less would be given a discount, which will encourage low mileage drivers to sign up with the company who gives the discount, especially if they raised rates on high mileage drivers. Not all insurance risks are proportional to miles driven. The risk of the car being stolen for example only declines a little. Drivers who drive very little are likely to be more dangerous, but so are those that drive a lot if they are more likely to fall asleep etc on long distance journeys.

I wish we could pay less insurance for not driving much. Here third party damage insurance is paid through the government with our annual vehicle registration, though a private insurer covers the policy. Registration cost us $A760 or so for the year. We have separate insurance for loss or damage of our car, which cost a similar amount. It would be nice if the registration could be proportional to kilometres driven.

On other externalities discussed in our article, our car is not very fuel efficient. It has a 4 litre engine. As we don't drive much - Snork Maiden walks to work - I've joked that we are doing society a service by taking this large high carbon emissions vehicle off the road for most of the time :)