Everything's better with insurance!

A couple of days ago, Ezra Klein wrote a post on "pay as you drive" insurance that I wanted to respond to, but I, er, forgot. Well, no time like the present!

The question is how you move towards such a system. Currently, low-mileage drivers subsidize high-mileage drivers. Progressive, for one, is rolling out a pay-per-mile scheme, and it's a pretty good bet that only low-mileage drivers will sign up. This might make the project unprofitable. Or it might spur to throw their lot in with low-mileage drivers, raising rates on the high-mileage drivers or off-loading them onto other insurers. This in turn might force the other insurers to move to pay-as-you-drive schemes. It's essentially the same risk shifting that happens in the individual health insurance market, where insurers price their product to advantage healthy enrollees and keep trying to drive out sick people. The difference is that we actually want to discourage driving, or at least make people pay for it, while we don't want to keep folks from getting necessary health care. This is that rare devious insurance cost shifting scheme that I actually like!

This, of course, highlights the reason that adverse selection is even nominally a problem in health insurance markets: the government works very, very hard to prevent firms from pricing to risk.

The main problem I see in the movement to pay-as-you-drive insurance is that so much of the benefit is a positive externality. Progressive gets moderately better profits with the ability to price discriminate more effectively, but I assume that if this experiment actually works, those profits will be rapidly competed away. Meanwhile, most of the benefits go to people who get them whether or not they have pay-as-you-drive insurance: people driving on less congested roads, breathing less smoggy air, enjoying the beachfront property that is not covered by rising sea levels. I'm happy to think that we might move to a new, better equilibrium, but the cynic in me has doubts.