quickly in all jurisdictions. The take-up has been rapid in some European coun- tries (most notably Italy) and jurisdic- tions in the US but in Australia the adoption has been small. The problem is not technology related; rather the differ- ence in growth rates is a very good exam- ple of the importance of the regulatory environment. In Europe, there is limited regulation
that affects the pricing of motor vehicle insurance.3 In Australia (and a few other coun-
tries) motor vehicle insurance is sepa- rated by law into cover for bodily injury (which is compulsory) and cover for motor vehicle damage. Bodily injury premiums are regulated
such that, with minor qualification, a person who drives aggressively in an old heavy vehicle pays the same premium as a person who drives carefully in a com- pact car with good safety features. The effect is to cross-subsidise the high-risk drivers (and vehicles) at the expense of the safe drivers (and vehicles). The regulation in Australia limits insur-
ers in offering discounts for safer driving on bodily insurance premiums, thereby significantly reducing the benefits of UBI for drivers. The consequences are, literally, deadly
— by hindering the uptake of UBI, such regulation may contribute to an unnec- essarily high road-toll.4
Ironically, in this
Decade of Action on Road Safety, the most promising advance in improving road-safety in developed countries may occur most where there has not been government action in intervening in insurance markets.
MAY THE ENFORCEMENT BE WITH YOU However, even in the UK, the potential role for insurers in road safety is much more significant. An implication of in- car safety technologies such as UBI is that insurers are taking on road-safety man- agement functions that are traditionally the domain of governments and central agencies such as the police. These roles include road safety research, determining unsafe driving practices (e.g. night-time driving), setting penalties5
, monitoring
behaviour (using telematics technology) and enforcement (through application of penalties and rewards). With insurers increasingly taking such
an active role, we might ask who is best placed to undertake each function. Aside from ensuring that drivers are insured,
38
what benefit is there to traditional road safety regulation over regulation by the private insurance market? The answer may be very little. Insurers have significant advantages
as road safety regulators. Relative to tra- ditional enforcement (e.g. police, speed cameras), telematics provides a clear advantage by enabling in-vehicle, real- time monitoring and enforcement. In theory, it might seem possible for gov- ernments to employ telematics technol- ogy but in practice this seems unlikely. Whereas people willingly offer their driv- ing behaviour information to insurers to get lower insurance premiums, it seems likely that ‘big brother’ privacy con- cerns would prevent governments from collecting such information.
MARKET FORCES There are other reasons for wanting private insurers to be involved. Insur- ers can more flexibly trial different programs. Importantly, with the right incentives, insurers would compete to innovate and find the best programs that achieve safety goals without being overly burdensome or unreasonably restricting freedoms. For example, drivers in the UK can currently choose from a range of UBI policies. Those insurers that fail to iden- tify and enforce safe driving practices face higher claims costs and will need to modify their policies. Those insurers that enforce unnecessary conditions that consumers dislike will lose business to those that don’t. Drivers who think that their current insurer is too much like ‘big brother’ can switch to a policy by an insurer who reminds them of a ‘chilled- out cousin’. But there is a hitch. An insurer’s financial incentive is to reduce claims
smarthighways.net
Dr Richard Tooth
costs, not reduce the road toll. The value of preventing fatalities and serious inju- ries is, of course, much greater than what is paid through claims. In the case of some fatalities, the claims costs may be little more than the funeral costs. In Aus- tralia, the value of preventing a random road fatality is commonly assumed to be around $6 million (£3.5m) but the aver- age claims costs associated with a fatality is around $0.5 million.6
Thus, a road-
safety project that costs $3 million per life saved would be considered worth- while by a government agency but be considered loss-making by an insurer.
WHERE THERE’S A CLAIM, THERE’S ALSO GAIN Regulation could be used to align insur- ers’ incentives with societal interests. A simple approach would involve requiring insurers to pay a levy when their insured drivers cause a crash that involves a fatal- ity or an injury to another party. The levies collected could be returned to all insurers so as to ensure that average pre- miums do not increase. Furthermore, the funds collected could be returned in a way to mitigate (by way of a cross- subsidy) the impact on inexperienced drivers, who would otherwise pay more. Under such a model the average insur- ance premium would likely fall due to the reduction in the road toll. The shift in incentives would be large.
In Australia, it would involve undoing the current regulation that dampens the incentives. As a rough guide, the current Australian regulation, which limits pricing for bodily injury risk, halves the insurer’s incentives to invest in road-safety. Align- ing insurers’ incentives with societal inter- ests would see the insurers’ incentives to invest in road-safety double again. The consequences would be dramatic.
The reform would drive a shift from a centralised approach to road-safety mon- itoring and enforcement to a market- driven approach. Such a change would fuel greater investment by insurers and their policyholders in smart technologies to further reduce the road toll. Insurers would become the large
investors into road-safety technology. The need for government-based moni- toring and enforcement would reduce and insurers could displace the police as the primary force monitoring road-use. Relative to the existing approach, the insurance market-based approach to road safety has potential to be more effi- cient, fair and effective.
Vol 2 No 1 smartHIGHWAYS
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64