The following is a post from Jim Levinsohn, Director, Jackson Institute for Global Affairs, Yale University, and George Mohler, Director of Data Science, Metromile
If you’re like most drivers, the answer seems to be “yes.”
We analyzed 191,699 trips made by Metromile customers who started out on a free test drive program and later switched to pay-per-mile insurance. (Each switcher had at least 30 days of driving before and after the switch). On average these individuals drove 16.4 miles per day before purchasing per-mile insurance. After switching, they drove on average 15.5 miles per day—a reduction of 6%.
What’s going on here? It turns out that economics predicts exactly this outcome. When you buy traditional car insurance, you pay a fixed premium. That means that when you’re deciding whether or not to make a given trip, insurance cost doesn’t enter the calculation since that cost is invariant to whether or not you make the trip. You might consider the cost of gasoline and your time, because those costs increase if you make an extra trip, but not insurance costs. One consequence of traditional car insurance is that drivers with below average mileage in effect subsidize the premiums of drivers with higher mileage (an individual’s risk of an accident in a year increases with miles driven).
But when your car insurance is on a per-mile basis, the equation changes. Drivers with below average mileage start to save money, whereas drivers with above average mileage pay more. The less you drive, the lower your premium, so there’s a clear incentive to reduce your miles driven. In order to achieve the same incentive for reducing mileage, the tax on gasoline would need to be on the order of $0.74 per gallon! This is larger than the state gasoline tax in even the highest tax states. Simply changing the way insurance is priced has significant environmental advantages. (more…)