Accident cost, speed and vehicle mass externalities, and insurance

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Lars Hultkrantz
Gunnar Lindberg

Pay-As-You-Drive (PAYD) automobile insurance enables insurers to charge the vehicle owner per mile instead of a pre-set number of miles per year. PAYD is offered to motorists on an optional basis, i.e., they can also choose a conventional scheme. PAYD insurance builds on the improved possibilities brought by new in-vehicle technologies for measuring distance driven. However, there is a range of other risk factors that could be supervised, some of which are already used by the insurance industry. For instance, one Swedish insurance provider charges a lower premium to vehicles that have an alco-lock installed to make it impossible to use the vehicle for an intoxicated driver. In this report, we summarize some work we have done on how to incorporate two of the most important risk factors; vehicle mass and speed. The possibility to differentiate insurance premiums according to various risk factors raises questions on the interaction between vehicle insurance schemes and taxes. Distance driven, speeding and vehicle mass are in many countries subject to taxation (for instance gasoline tax for distance, speeding tickets for speed and vehicle tax for vehicle mass). We will briefly discuss how a PAYD scheme with a speeding penalty (this will here be called Pay As You Speed, PAYS) can be combined with taxes to implement a Pigou taxation of road accident externalities. We summarize results from a vehicle-fleet experiment with a PAYS insurance incentive for keeping within speed limits using a speed-alert device. The PAYS scheme was simulated with a monthly bonus to participants during two months reduced by a non-linear speeding penalty. We analyse this “mass externality” using a database including collision accidents in Sweden involving two passenger cars during five years. Finally, we discuss different solutions to internalization of this external accident cost. We calculate a mass dependent multiplicative tax on the insurance premium in a no-fault insurance system.

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