> **"Pay-at-the-Pump" Auto Insurance:**
>
> **An Idea Going Nowhere Fast**
>
> One recurrent proposal to change the automobile system \-- known as
> "Pay-at-the- Pump" or "Pay-as-You-Drive" \-- would require consumers
> to pay a fuel surcharge each time they buy gasoline. On a monthly
> basis, each gas station would turn the surcharges over to a new
> government bureaucracy which, after deducting its own administrative
> costs, would transfer the money to the automobile insurers. These
> revenues would cover the mandatory component of automobile insurance
> liability premiums. In addition to the fee per gallon, each private
> passenger vehicle owner would be required to pay a fixed fee per
> passenger vehicle at registration. In some proposals, this fixed fee
> would be doubled or tripled if a check of the driving record showed
> one or more moving violations.
>
> Estimates of the size of this surcharge vary considerably among the
> sources analyzing this issue and among the states considering this
> initiative. When a California-specific plan was proposed in 1993, an
> independent actuarial firm determined that such a system would raise
> gasoline prices by \$1.24/gallon \-- just to cover the minimum
> liability insurance under state law. This would essentially double a
> motorist's gas expenditures for basic liability coverage only. The
> purchase of additional insurance coverage (higher limits and property
> coverages) would obviously cost more.
>
> **Auto Insurance System is Now Quite Healthy and Does Not Need Radical
> Surgery**
>
> **Such as "Pay-at-the-Pump"**
>
> About twenty years ago, "Pay-at-the-Pump" was developed to advance the
> simplistic theory that insurance risk increases proportionately with
> miles driven: "the more you drive, the more you pay." This plan,
> however, ignores all of the other automobile risk factors, such as
> driver experience, accident history, the model and year of a vehicle,
> and where the vehicle is driven, that together have more predictive
> weight. Despite its periodic reemergence in the policy debate, no
> state has adopted "Pay-at-the- Pump" as an alternative to the
> traditional auto insurance system. Recent advances in highway and auto
> safety, law enforcement, and fraud fighting have provided tangible
> benefits to consumers and further obviate the need for radical
> alternatives such as "Pay- at-the-Pump."[^1]
>
> The American Insurance Association (AIA) believes that the public is
> best served by individual insurance companies offering private
> passenger automobile insurance as they do now, not through a new layer
> of state government controls. There are several fundamental problems
> with "Pay-at-the-Pump" that concern economic fairness, automobile
> safety, and the feasibility of another layer of state employees to
> administer this plan, as discussed below.
>
> **Proposal is Unfair to Consumers, Causes Unsafe Driving Practices,
> and**
>
> **Creates Cumbersome State Agencies**
>
> \(1\) "*Pay-at-the-pump" cross-subsidizes drivers by overcharging some
> and undercharging others.*
>
> Annual mileage is a poor proxy for risk when it comes to automobile
> insurance. Not all miles are the same in terms of crash risk or
> insurance risk.[^2] For example:
>
> • [An urban mile results in more accidents than a rural
> mile.]{.underline} There is a strong positive correlation between
> "vehicle density" (the number of cars traveling per lane on a given
> road) and insurance losses. In fact, cars driven in cities generate
> substantially more injury claims than those driven in the suburbs.[^3]
> A "pay-at-the-pump" insurance system would require the redistribution
> of vehicle insurance costs among the consumers according to the level
> of fuel consumption alone, without considering where those miles are
> driven. Moreover, higher gas costs would have a disproportionate
> impact on those drivers who do not drive in urban areas where gasoline
> emissions and air pollution pose the greatest threat.
>
> x
>
> • [Teenage drivers cause more accidents nationwide than drivers in
> other age categories.]{.underline} Statistics from the Highway Loss
> Data Institute demonstrate that teenage drivers are the most likely to
> cause serious auto accidents. This is due primarily to a teenage
> driver's relative inexperience driving the vehicle and incomplete
> knowledge of the roads upon which he is driving. Secondarily, the
> teenage driver is somewhat more likely to have alcohol in his system
> than drivers in other age categories. "Pay-at-the- Pump" fails to
> recognize this important determinant of crash risk.
>
> x
>
> • [The liability exposure of a driver with a long list of prior
> accidents is greater than of a driver with an accident-free,
> violation-free record.]{.underline} Numerous accidents on a driving
> record reflect adverse driving patterns of the driver such as driving
> too slowly or too fast, failing to use directionals, and driving
> recklessly. "Pay-at-the-Pump" rewards dangerous drivers at the expense
> of those with "clean" driving records.
>
> Thus, age and condition of vehicles affect risk, as do location, the
> size and weight of the vehicle, and the age and driving record of the
> driver. Ignoring these factors is unfair to those who are overcharged
> because their safety records are overlooked.
>
> *2. "Pay-at-the-pumps not an effective environmental measure.*
>
> In a "Pay-at-the-Pump" system, rural drivers would be subsidizing
> their urban counterparts. Rural drivers, by definition, live in less
> densely populated areas and must travel greater distances in the
> course of a given year. However, urban drivers contribute more heavily
> to air quality problems in the most polluted cities of this country.
> Since urban drivers do not consume as much gasoline as rural drivers,
> a gas surcharge would not force them to carry their weight for the
> pollution they cause. The "Pay-at-the-Pump" system would not change
> their driving patterns enough to ease urban air pollution or CO2
> emissions, as the environmentalists hope. Past oil price shocks have
> shown only marginal changes in the driving habits of Americans.
>
> *3. Small, fuel-efficient cars will become the \[less safe\] vehicles
> of choice.*
>
> Large, less fuel-efficient vehicles would subsidize smaller and
> [less]{.underline} [safe]{.underline} vehicles in the proposed
> scenario. Since the late 1950s, studies have consistently shown very
> strong relationships between vehicle size and occupant death and
> serious injuries. The National Highway Traffic Safety Administration
> (NHTSA) collected the findings from several studies about certain
> accident types to arrive at the estimate that annually, nearly 2000
> occupants of downsized cars are killed because of size reductions that
> have already occurred since "Pay-at-the-Pump" was first proposed
> (1975).[^4] The shift to small cars is very likely to accelerate under
> "Pay-at-the-Pump" and this will take its toll in terms of more serious
> injuries and deaths each year.
>
> *4. State government cannot possibly take on a system of this
> magnitude effectively* *without a huge new bureaucracy.*
>
> The creation of additional state agencies to monitor gas station
> revenues and collect the appropriate surcharges would result in a
> bureaucratic nightmare \-- layers of people to oversee vehicle
> registrations, collect monthly revenues from all service stations,
> hold auctions on blocks of drivers for the insurers to bid on, and
> transfer the appropriate moneys to the corresponding insurers.[^5]
> Most states do not have the revenue in their budgets for layers of
> people to administer these programs adequately and in a financially
> sound manner. In 1993, California's Department of Motor Vehicles
> estimated that a "Pay-at-the-Pump" law would cost \$74 million
> annually in personnel and equipment.
>
> *5. A "Pay-at-the-Pump" system easily could become insolvent.*
>
> There are significant concerns about the ongoing solvency of such a
> state-run fund. During times of state budget shortfalls, lawmakers
> could be tempted to tap "Pay-at- the-Pump" funds for other uses, thus
> increasing the likelihood of future insolvency. There have been
> several failures of state-run plans in recent years, requiring
> substantial capital infusions or termination of the fund: worker's
> compensation funds in Ohio, Nevada, Colorado, Wyoming, Montana, North
> Dakota, West Virginia and Minnesota; and catastrophic injury (auto)
> funds in Pennsylvania and the residual auto market in New Jersey. In
> each of these situations, there was underpricing of insurance,
> uncontrolled costs, or general mismanagement. A "Pay-at-the-Pump" plan
> could cause a state agency to end up in a similar situation, requiring
> even higher costs to bail out the system.
>
> *6. "Pay-at-the-pump" will encourage the practice of border-crossing
> in order to evade the system.*
>
> Since states would be likely to enact "pay-at-the-pump" systems on an
> isolated basis, drivers could cross the borders of their state to
> purchase cheaper gas in neighboring states. Enforcement of borders
> would be unrealistic and prohibitively expensive. In addition, there
> is potential for fraud in black market gasoline and fake vehicle
> registrations. Because of these potential loopholes, "Pay-at-the-Pump"
> is not an effective way of solving the uninsured motorists problems
> that exist in some states.
>
> **Why Gut a Healthy Auto Insurance System?**
>
> "Pay-at-the-Pump" insurance is a worn, overly simplistic idea. It will
> systematically overcharge some drivers and undercharge others. It will
> create opportunities for fraud and black market purchases. It will
> require a huge state bureaucracy to administer the plan. If it does
> not work, taxpayers will face even higher fees to bail out the system.
> Three wrongs simply do not make a right.
>
> It is widely understood that the automobile insurance system has
> improved dramatically over the last several years. Automobile safety
> initiatives such as airbags, passenger restraints, and anti-lock
> brakes, have both saved lives and reduced the severity of passenger
> injuries. Tougher law enforcement on the nation's highways has been a
> deterrent to excessive speed and reckless driving. Automobile fraud is
> not only the focus of insurance companies' cost containment efforts,
> but it is also attracting the scrutiny of consumers. Reduced fraud of
> all types means curbing costs. As costs come under control, auto
> insurance becomes more affordable to those individuals who previously
> had driven uninsured. Collectively, these initiatives have served to
> make the auto insurance system healthier and more efficient. As the
> old adage goes, "If it ain't broke, don't fix it."

[^1]:
    > Crenshaw, Albert B., "Auto Insurers Find the Road to Recovery,"
    > *The Washington Post*, (Washington, DC: 8/30/95), pp. F1, F3.

[^2]:
    > National Association of Insurance Commissioners, *Automobile
    > Insurance Database,* (Kansas City, MO: January 1993).

[^3]:
    > Highway Loss Data Institute, *Insurance Special Report: Insurance
    > Losses by Vehicle Density* 1990- 1992 Models (A-40), (Arlington,
    > VA: 1993).

[^4]:
    > National Highway Traffic Safety Administration, *Effect of Car
    > Size on Fatality and Injury Risk*, (Washington, DC: 1991b).

[^5]:
    > Tobias, Andrew, *Auto Insurance Alert! Why the System Stinks, How
    > to Fix It, and What to Do in the Meantime*, (New York, Simon &
    > Schuster: 1993).