Why is auto insurance ridiculously overpriced for those who drive few miles?

Question

It's not just one company. The problem is our current driving is something under 4,000 miles/year and the discounts for low driving aren't remotely as big as the difference in mileage.

I don't think my personal situation affects the cost because the puny discounts for low mileage aren't limited to certain groups but here goes: 52 year old married male (my wife doesn't have the vision to drive, she has no bearing on it), no at-fault accidents (one accident where the other side was clearly at fault, it didn't change my rates) or tickets within the window they can look at. The car is garaged in the suburbs. I have a 4 year old car with 17k miles.

The vast majority of their risk comes from driving and thus should be approximately linear with the amount of driving I do. Things rarely happen to cars in garages.

Answer 1

There are several aspects to this but at a high level it boils down to

• To some extent the insurer has fixed costs.
• Underwriters apparently think there is a marginal decrease in risk for each marginal mile driven.
• In the case of comprehensive coverage the car is being covered whether or not it's being driven, insurers are about to get pummeled with flood claims even though many of the affected autos were just sitting in garages and on streets.

A lot goes in to insurance rating and risk projecting. You can't adjust a single variable and expect a proportional change in your premium, 7,000 miles per year just won't be 70% of the cost of 10,000 miles per year, because there are a lot of other things in play as well.

To further address premium adjustments. Consider this:

Your fixed cost policy fee is $25
Your liability coverage is $100
Your comprehensive coverage is $75

Your total premium is $200

Even if your liability coverage did scale with perfect correlation to your mileage (using the same 70% from above, 7,000 miles per year versus 10,000 miles per year) then your premium composition is:

Policy fee: $25
Liability coverage: $70
Comprehensive coverage: $75

Total premium: $170

$200 to $170 is 15%. No change will have a direct linear correlation to your total premium because there are different component pieces of the total premium. Fixed costs may be built in to the amounts for other component pieces of the premium, for example maybe no line of coverage ever has a cost below $X.

Obviously these numbers are all made up

Additionally, and also less considered is the fact that your liability also scales because of a lot of factors that have nothing to do with you. It might be the other cars that are on the road, it might be that more densely populated areas have more fender benders. For example if you live in Beverly Hills you have a much higher likelihood of accidentally bumping a $70-$80-$90-$100k+ car than you do in say, rural Wisconsin. If your zip code is gentrifying and everyone starts buying Mercedes, your liability coverage increases.

You can not adjust one single variable and decide that you are lower risk than all insurers think you are. If you shop this coverage and all insurers are within a nominal margin of pricing for the same coverage levels, there isn't much to argue with; you are simply riskier than you think you are and the variable you are focused on is not as meaningful as you think it is.

Answer 2

Not all miles carry the same amount of risk. A survey by Progressive indicated that accidents are most likely to occur within 5 miles of home, and 77% of accidents occur within 15 miles of home. Only 1% of accidents occurred 50 or more miles from home. That's from 2002, but it seems unlikely to have changed much. Since the miles closest to your home carry more risk, they cost more, and low-mileage discounts reflect that.

There are per-mile insurance options in a few states which could save you money, but they do constant monitoring via that ODB2 telematics device, and other insurers offer discounts if you accept their monitoring either in perpetuity or for a limited period of time.

Without monitoring, insurers don't know if that 4,000 miles of driving is spread into a few mid-day trips each week, or maybe you're doing all that driving from midnight to 4am on weekends (fatalities far more likely), or from 5-7pm during weekdays (accidents far more likely).

Personally, I save ~10% by being a 'low-mileage' driver, and am currently in the middle of a 90-day monitoring, so might go lower, but given that accidents are far more likely close to home, 10% feels pretty significant and appropriate.

Answer 3

4000 miles a year is not a few! European average is about 9000... But nevertheless...

But when it comes to risk, then:

1) Nothing stops you from changing circumstances and drive 10 times as much as in previous yers. The insurance remains the same. The only thing the insurance company can do is to charge you more next year (taking the miles you've made this year as a basis for calculations)*

2) Drivers who drive very seldom are a huge risk because of their low experience. I know a few people that drive more than 100 miles only a few times a year, and on average once a year have accident during that drives. It doesn't mean that an average sunday driver have similar risk of accident as daily driver, but it's in no way similar.

*) Germany/Switzerland based, the whole EU is likely to be the same

Answer 4

Many services charge prices that do not scale linearly with usage. This is because the service provider has fixed costs that they must recoup by charging a rate with a fixed component. A 5-mile taxi ride is unlikely to cost half what a 10-mile taxi ride costs. Even a half sandwich at a sandwich place usually costs more than half of what a full sandwich costs. In this respect, insurance is no different from many other items you may purchase.

Answer 5

Some proportion of the costs of a policy have little to no relationship to miles driven. Think of costs of underwriting, and more especially sales/marketing/client acquisition costs (auto insurance isn't in the same league as non-term life insurance (where the commissions and other selling expenses typically exceed the first year's worth of premiums), but the funny TV ads and/or agent commissions aren't free), as well as general business overhead.

Also, as noted by quid, some proportion of claim risk isn't correlated to distance covered (think theft, flood, fire, etc.).

There are also differences in the miles that are likely to be driven by a non-commercial/vehicle-for-hire driver who puts 25k miles a year vs. one who puts 7k per year. The former is generally going to be doing more driving at higher speeds on less-congested freeways while the latter will be doing more of their driving on crowded urban roads. The former pattern generally has a lower expected value of claims both due to having fewer cars per road-mile, fewer intersections and driveways, and also having any given collision be more likely to result in a fatality (paralysis or other lifetime disability claims are generally going to exceed what the insurer would pay out on a fatality).

Answer 6

1. Other people lie to the companies about how many miles they drive, so they can't take the mileage figures literally.

2. You aren't specifying whether you want liability only, or more-comprehensive insurance. Stuff happens when you aren't driving. Cars get stolen. Other drivers hit parked cars and leave. Trees fall on parked cars.

3. Move to Virginia where insurance is not required. Just pay $500 a year for not having insurance, and be careful.

Answer 7

because it cost the insurer more, obviously. while this sounds snarky, it's important to realize that actual insurance companies set their insurance rates based on actual historical costs. for some reason people who report low miles have cost the company more dollars per reported mile than people who report high miles. in that sense, insurance is not overpriced. if it were truly overpriced, then an insurer would specialize in such insurance and make a killing on the free market.

the more interesting questions is why do drivers who claim to travel very few miles cost the insurance companies so much per mile? that question has a host of possible answers and it's difficult to say which is the largest cost. here are just a few:

1. some people lie about how many miles they drive. these liers are also more likely to lie about other things like how many accidents they've been in or whether some damage to their car was caused by a covered accident or some uncovered event. moreover, it's nearly impossible to catch a liar since well-meaning people grossly underestimate their miles driven all the time. in fact, on the rare occasion when an insurer tries not to cover an accident because the driver far exceeded their mileage, the public outcry is so negative they are effectively unable to do so.
2. some insurance costs are unrelated, or even inversely related to typical miles driven (e.g. hail damage, theft risk, parked car accidents, advertising, billing and customer support overhead, accidents while driving to the hospital, windshields broken by crazy exes, etc.)
3. people who drive less often tend to be worse drivers. obviously, practice makes perfect. less obviously, some people drive less because they know they're bad at it or simply can't be bothered to pay attention. moreover, people tend to pay less attention to their driving when they are on a familiar road and are therefore more likely to hit a deer, etc. than when on a road they must examine closely to navigate.

Answer 8

First you have to understand that insurance is basically a social system, just with Shareholders. Insurance costs consist of 3 factors:

1. Estimated mean damage costs.
2. Overhead for managing the contracts and claims, reinsurance etc.
3. Profit. (for the shareholders)

Now, to encourage a low-risk behavior a separating factor is search in the vast amount of statistical data. Drivers experience, miles and type of car being the most common, but also other things like oldtimer-status etc. are possible.

If it so happens that the 3-5000 miles driver do only in average have 80% of the damage-costs of a comparable group 5-8000 miles driver, you´ll get the 20% bonus on factor 1.

So the answer is, it is not overpriced, there is just no linear relationship to mileage.

You can´t divide your insureds in too many groups or you´ll miss the mutual aspect of insurance. If everybody just pays his own risk, he can just do so in his bank and save on overhead and profit.

Answer 9

There is plenty of over-rationalisation in the majority of these answers, when the simple answer is that it is simply down to statistics.

Say an insurer had two pieces of information about two separate drivers: annual mileage, and whether they had had an accident in the last 3 years.

Driver A drives 10,000 miles a year and hasn't had an accident in the past 3 years. Driver B drives 500 miles a year and hasn't had an accident in the past 3 years.

Which would the insurer think was the safer bet? The answer is A, and this makes his premiums lower. The reason for this is that the insurer has a lot more data about Driver A than Driver B: they know that Driver A has driven 30,000 miles without having an accident. This could, of course, be luck, or a fluke, but it is likely that Driver A is actually a safe driver. The chance that Driver A hasn't had an accident just through sheer luck and that they are actually a terrible driver is quite slim.

On the other hand, Driver B has only driven 1,500 miles in the past three years. Whilst this seems like prima facie evidence of them being as safe a driver as Driver A, it is much more likely that Driver B could have driven 1,500 miles and avoided an accident through sheer luck, even though they are a terrible driver.

This means drivers who drive low amounts of mileage will be penalised relative to other drivers who have high mileage. It has nothing to do with insurers taking a judgement that 'doing more mileage makes you more experienced' or 'makes you a better driver' as others have suggested here (although, it is probably true - it's not quantifiable from an insurer's perspective).

Answer 10

One reason is because car insurance is mandated. Mandated insurance means the government is forcing people to purchase it, which also means that everyone must have the opportunity to purchase it at a reasonable cost, even if the insurer would normally not choose to insure them. In mandated industries, risk pools are formed which means that as a whole, lower risk members partially subsidize higher risk members. In mandated industries that have a large risk variance, the insurance system would break down if everyone was charged their "fair share" because high risk members would be unable to afford a policy. (This is even more prominent with health insurance than car insurance because the difference in risk is vastly greater.)

On a positive note, perhaps you may get a warm and fuzzy feeling knowing that you are helping out others "in need".

Answer 11

Insurance rates are about assessing risk.

If the insurer has no way to reliably and easily assess usage, they will not reduce the premiums.

Many companies are providing tracking devices that connect to the OBD-II port. This not only tracks actual miles driven, but can typically track aggressive driving, time of day, length of trips, and other information.

Unless you are using this kind of device to give the insurer actionable feedback on your driving habits, do not expect any discounts for mileage or usage.

Answer 12

People who drive long distances tend to do more of their driving on larger, well-built roads (freeways / motorways) that are designed for high-speed driving. Although some people find them intimidating, they are much safer in terms of accidents per kilometre driven for several reasons:

• No sharp corners or obstructed lines of sight
• Relatively few junctions
• No traffic lights
• Drivers are generally fairly well behaved
• Relatively few distractions
• Clear road markings
• Very smooth, well-maintained road surface
• Clear signposting