Progressive auto insurance and other insurance companies are considering charging customers based on the number of miles they drive and other driving behavior (like frequent quick acceleration or hard braking). Data on this behavior would be collected via

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05.07.2022 - 18:07

Progressive auto insurance and other insurance companies are considering charging customers based on the number of miles they drive and other driving behavior (like frequent quick acceleration or hard braking). Data on this behavior would be collected via

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Progressive auto insurance and other insurance companies are considering charging customers based on the number of miles they drive and other driving behavior (like frequent quick acceleration or hard braking). Data on this behavior would be collected via an onboard monitoring system. One UC Berkeley economist, Aaron Edlin, thinks that such devices and payment schemes should be mandated by the state. He claims that ‘insurance companies have some limited incentive to adopt pay-as-you-drive insurance if they want to be a niche company and specialize in serving low mileage drivers.’ (San Jose Mercury News). Why does Edlin see companies that require the devices becoming ‘niche’ players? How is this an example of adverse selection? How would a state mandate solve the problem?

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Willa April 17, 2023 в 18:22

Edlin sees companies that require devices becoming 'niche' players because not all customers would prefer to have their driving behavior monitored, and some may be willing to pay a higher premium in order to avoid it. This creates adverse selection, where those who opt-out and pay a higher premium are more likely to be high-risk drivers, causing the insurance company to lose money. By mandating the use of monitoring devices and pay-as-you-drive insurance, all customers would be required to participate and insurance companies wouldn't have to worry about adverse selection. This would allow them to offer lower premiums to both low and high mileage drivers, giving them a competitive edge in the market.

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