Monday, January 05, 2009

Insurance by the Mile?

On a consumer-oriented online forum at which Bob and I frequently post [full disclosure: we've both received golf shirts for our "services" there], a poster recently brought up the idea of auto insurance based strictly on the number of miles driven. Neither Bob nor I are P&C agents, but we have enough knowledge of insurance principles to know that, when something sounds too good to be true, it often (usually?) is.
Another frequent poster, who happens to be a state insurance regulator, also weighed in with his opinion of the phenom. The three of us concurred that the scheme, while unique and interesting, had a number of flaws.
Briefly put, "insurance by the mile" is designed so that one signs up, and pre-pays for insurance based on the number of miles one anticipates driving for the next six months. These miles are audited, of course, lest one be tempted to "lowball" the company. There is apparently no other underwriting.
I probably wouldn't even blog on this had not alert IB reader Holly R sent me this link this morning:
In other words, they like the idea, but implicitly question drivers' honesty as regards miles driven.
The TNR article contains another even more serious, if less obvious, error:
"This process, better known as adverse selection, is what causes individually-purchased health insurance to cost a lot more than a comparable employer-provided plan."
As we've repeatedly pointed out here at IB, the only advantages to employer-based coverage are guaranteed issue and the "convenience" of payroll deduction. Individually underwritten plans for health folks are always less expensive than group (this may not seem obvious, until one recalls that the employer "subsidizes" the group premium).
Now, I have no horse in this particular race, but I would be very concerned about sharing the road with someone who didn't understand basic risk management, and how carriers determine risk and premium.
Methinks that there's a very good reason that there's only one carrier even testing these waters.
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