Lawrence Solomon
National Post
October 14, 2006

Governments in Canada and the United States sympathize with the plight of reckless automobile drivers: To save them from the exorbitant automobile insurance rates needed to provide them and other risky drivers with coverage, our government regulators order insurance companies to artificially lower the premiums that they and otherwise risky drivers, such as teens and the very old, would otherwise face. To pay for these subsidies for bad drivers, the government forces insurance companies to overcharge good drivers. All this occurs below the radar of automobile owners, who are kept in the dark about what drives auto insurance increases.

The government regulations accomplish their goal: Rates for risky drivers, though still high, are depressed enough to make sure bad drivers remain on the road. And despite the higher fatalities and higher premiums, good drivers complain little and know less.

Soon all this will change, thanks to a revolution that just began on the roads of Great Britain. Premiums for drivers liable to do harm will soar while those for good drivers will decline. Rates for responsible young drivers will especially decline. Accident rates will plummet. And all drivers will no longer be blind as to what drives insurance premium rates.

The revolutionary is Norwich Union, one of the U.K.’s largest auto insurers, who last week provided the British driving public with the option of switching to a pay-per-mile (and pay-your-own-way) system in which satellites track the movements of their vehicles. After a two-year test-drive of the scheme involving 5,000 auto owners, and a smaller trial of 18 to 23-year-olds that began in 2005, the company is convinced that at least half of Britain’s drivers will be switching to a pay-per-mile policy. That estimate may be conservative: Norwich Union’s market survey of the British public found more than two-thirds would consider switching.

The British system of auto insurance is already the world’s most efficient, charging on the basis of a host of market factors – not just the driver’s age and accident record but also where he lives and where he parks his car. As a result, British insurers determine risks accurately and the British public benefits from low insurance rates for good drivers and low accident rates for all.

To determine risks more accurately still, and thus further lower premiums and accident rates, Norwich Union now adds three other factors for those willing to place a tracking device in their vehicles: the distance a car travels, the types of road it travels on and the times at which the traveling occurs. A low-risk 40-year-old could pay as little as 1 pence per mile to drive on a divided highway at 2 p.m., and 1.5 pence on the same highway at 8 a.m. during the morning rush hour, when driving is more likely to lead to an accident. That same driver would pay seven times as much to drive at 2 p.m. on a slow city street, which is surprisingly more accident-prone, and eight times as much on that same street in the morning rush hour. Other types of roads fetch other rates: A two-lane highway, for example, would cost this driver 1.5 pence at off-peak and 2.5 pence at peak times.

Norfolk’s actuarially based system sends price signals to those who use the road, registering for them in their pocketbook what’s safe and what’s not.

The pocketbooks of young drivers get the sharpest signal.

To drive at a peak time, which for 18- to 23-year-olds falls between 11 pm and 6 am, costs a whopping (ps)1 per mile. These rates reflect government data, which shows that young drivers are 10 times more likely to have an accident, and 56% more likely to suffer an injury, during the wee hours of the morning. At any other time, young drivers – less likely to have been partying or among others who are careless – pay 5 pence per mile.

These rates will not only save young lives – during Norwich Union’s trial, accidents fell by 20% among the 1,500 young drivers who took part – but money, too. Norwich estimates that 18- to 23-year-olds who sign up for the pay-per-mile policies could pay 30% to 50% less for their insurance than they do now. Moreover, because insurance will have suddenly become much more affordable for the young, responsible young drivers will now find choices opening up for them: Some will be able to travel to a job inaccessible by public transit; others might choose a better school that has suddenly come into range.

More generally, we’ll all be receiving an education into what drives insurance rates, and what needs to be done to reduce carnage on the road. Once Norwich Union has some operating experience, it will refine rates further – older drivers may have rates tailored for them, for example, to encourage safe and discourage unsafe driving, and lower the cost of driving in the process.

Because price signals haven’t been showing the way, we have been driving on needlessly unsafe streets, and in the process paying prohibitive rates, without realizing why. As put by Simon Machell, chief executive of Norwich Union: “People will start to understand exactly what they’re paying for.”