[Mpls] Re: pay at the pump insurance

[Jim Bernstein]

Chris has assembled a lot of information here and it is worth reading
for anyone who wants a quick primer on pay-at-the-pump insurance
schemes.  

There is one misconception however: "... the more you drive in traffic,
the more likely you are to have an accident."  That is not exactly true.
Miles driven and frequency of accidents do have a correlation though it
is a weak one.  

Better predictors are how you drive, when you drive, where you drive,
and your past driving record.  There are also some demographic factors
that are much more reliable predictors.  

One huge problem with pay-at-the-pump schemes is that they unfairly
punish people who drive great distances (presumably they fill up their
gas tanks more often) and unfairly rewards people who drive short
distances (presumably they fill up less often).  To make any casualty
insurance plan work, there must be a way of assessing risk and raising
or lowering premium to compensate for that risk. And, equally
importantly, that risk assessment must be based on data that accurately
weight the risk.  

Pay-at-the-pump only considers one element (frequency of gasoline
purchase) which is not a very good predictor of risk. Chris rightly
points out that this form of liability insurance would be essentially a
baseline with the option (or requirement)to purchase additional
coverage.  But the essential problem remains that frequency (or volume)
of gasoline purchase does not correlate very well to the risk. And that
makes it impossible to assign rates fairly and to calculate premium that
reflect the risk.  

Jim Bernstein
Fulton
Former Commissioner, MN. Dept. of Commerce (they regulate insurance)
   

-----Original Message-----
From: mpls-bounces at mnforum.org [mailto:mpls-bounces at mnforum.org] On
Behalf Of Chris Johnson
Sent: Thursday, February 24, 2005 3:15 PM
To: Tom Madden
Cc: mpls at mnforum.org; Dan Prozinski
Subject: Re: [Mpls] Re: pay at the pump insurance

There are generally three kinds of insurance you would purchase on your
car. 
I'll call them liability, collision and comprehensive, although your
insurer 
may call them different things.

Liability is insurance against harm you to do other people and other
people's 
property, including injuries, deaths, wrecked cars of other drivers and 
wrecked other objects (fences, houses, whatever).  The state requires a 
certain minimum level of liability insurance to drive legally.

Collision is insurance against damage done to your vehicle while
driving.  If 
you have a car loan or you lease your car, the money lender or leasor
(owner) 
require you to have some amount of this kind of insurance to protect
their 
financial interest.  If you own your car outright, this type is optional
for you.

Comprehensive is insurance against damage done to your vehicle from 
non-traffic related things, e.g. a tornado blows your garage down your
car, or 
a flood fills it with water.  This is again optional if you own your car
outright.

There are some other narrower types of insurance you might have, and
some riders.

Generally, Pay at the Pump would pay for only the Liability component.
On 
your current insurance policy, the amount of liability premium you pay
is 
mostly determined by factors other than the type or cost of the vehicle
you 
own.  It's more determined by your age, gender and driving record, where
you 
drive and how many miles you drive.  Thus it is pretty easy to fund a
minimum 
level of this kind of insurance at the pump.  The number one determinant
of 
how likely you are to have an accident is often what is called exposure.
That 
is, the more you drive in traffic, the more likely you are to have an 
accident.  It's easy to see that relatively speaking, the more you drive
and 
the bigger risk you are for accidents, the more gasoline you will buy,
and 
thus the more pump insurance tax you will pay into the risk pool.

Private insurance companies don't go away at all in a Pay at the Pump 
situation.  They are available for higher liability coverage amounts, 
something that is recommended anyway, as well as for Collision and 
Comprehensive insurance, and as well for special riders like "Rental
coverage" 
if an accident makes your car unavailable or "Auto glass coverage" for
broken 
windshields, etc.  There is still plenty of opportunity for private
insurance 
firms to make money by selling insurance beyond the Pay at the Pump
amount.

Plus, the existing insurance companies would probably form a pool which 
actually did get the money and cover the risk, just as they do for the
"high 
risk pool" now, for Pay at the Pump.  Their market share might have to
be 
decided by state regulators, but such a Pay at the Pump scheme could
well 
direct proportional amounts of the pump taxes to all of the licenses
insurance 
carriers in the state as determined by market share.

So in reality, the inurance companies lose some higher profits (they
would 
still make a profit) on the base required insurance, but would retain
all of 
their high profits on the coverages that most people want and have
beyond the 
bare minimum required by the state.

The upside for drivers is that no longer would they have the risk of
having 
completely uninsured motorists damage their car, damage other property,
or at 
worst, injure their passengers.  Instead of having to pay for that
"uninsured" 
or "underinsured" motorist insurance themselves, the other drivers would

already be covered via their own gasoline purchases.

Because the rate would be based on the amount of gasoline bought,
obviously 
the gas mileage a vehicle got would have some effect on how much each
person 
paid per mile they drove.  But this is actually a desirable effect in
that 
high-mileage, good fuel economy vehicles would pay less, which is a
positive 
societal outcome.  It burns less petroleum and produces less pollution.
It 
also might encourage fewer large, heavy vehicles, which cause an
inordinate 
amount of carnage on our highways.  It is somewhat regressive on drivers
who 
have to drive larger, heavier vehicles which get poor gas mileage,
although 
those who do so for business should be able to deduct the insurance tax
paid 
as a business expense.

 

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