1 November 2011Re/insurance

Better risk premium, less fun

Many insurance companies in California now price motor insurance by distance, rather than time behind the wheel. Premiums are based on the number of miles policyholders’ vehicles have been driven, in a programme authorised by the state’s Department of Insurance last year.

The concept is a win-win all over the place, apparently. Insurance companies gain information on driving habits and can thus set premiums more scientifi cally. While the programme is expected to reduce traffi c, a boon in a state whose cities are almost perpetually gridlocked, consumers love it too: more than 80 percent of Auto Club of Southern California policyholders buy such policies.

One’s first thought relates to the reporting process, and specifi cally to the potential benefits of under-reporting. The companies, however, have that covered. OnStar or other data recording and transmitting devices are mandatory for buyers of the policy, and driving a car equipped with OnStar in reverse is unlikely to reset the clock.

What’s novel about this type of insurance is that the risk premium can be more precisely tied to the risk. No more estimating on the back of envelopes and hoping for the best. What a wonderful world this would be for some of us if the idea were to catch on in government circles. Those without children would pay nothing for education. Those without cars would contribute little to the upkeep of the roads. Those who rarely, if ever, go out at night would pay less for street lighting: OnStar pedometers would do the reporting. Life would be just like the movies. If you don’t go to see Thor—and you shouldn’t, it’s a dreadful film—you cannot be charged the $27, or whatever it costs, to suffer the sort of massive headache 3D can induce.

Of course, the accounting for all this would cost a staggering amount for no overall fi nancial benefit. But, surely, no price is too great for getting things right?

The biggest losers from this new approach to motor insurance will be the senior management of the insurance companies. Car insurance by the mile renders the product a utility. Nothing wrong with that, I suppose, although from an executive viewpoint, “I run an insurance company” has a better ring (and carries better emoluments) than “I run an electrical plant”.

Change comes along all the time, especially in California, home, as Eric Idle remarked in The Rutles, to the University of Please Yourself. What will not please the insurance companies, one suspects, is the ongoing cost of the data they are buying. Once they know, more or less, how people drive—which they should already know well enough, as it’s their business—the only way to increase profi ts would be to raise rates. Utilities, of course, are even more toxically regulated than insurers, which might make sense where nuclear fi ssion is concerned, but rather less so for motor insurance.

For insurance to make a guaranteed return like a utility would, surely, be to take all the fun out of it for its executives, analysts, reporters and commentators.