Traffic accidents are a human tragedy that kills 1.2 million people worldwide annually. The cost of traffic accidents are huge and recent estimates for US alone suggest the cost to be USD 433 billion in year 2000 or 4.3 percentage of GDP. A reduction of this cost can be done in two ways, either by reducing the number of accidents or by mitigating the consequences of the existing accidents. Insurance systems can contribute to both. Vickrey (Vickrey, W. (1968), Automobile accidents, tort law, externalities, and insurance. Law and Contemporary Problems, Summer 1968) suggested a partial solution to problems of unaffordable insurance, uninsured driving, premium unfairness and inefficiencies by proposing usage-based car insurance. In fact, several insurance companies have now adopted Vickrey’s idea in the form of Pay-As-You-Drive (PAYD) automobile insurance. This policy enables insurers to charge the vehicle owner per mile instead of a pre-set number of miles per year. PAYD is offered to motorists on an optional basis, i.e., they can also choose a conventional scheme. PAYD insurance builds on the improved possibilities brought by new in-vehicle technologies for measuring distance driven. However, there is a range of other risk factors that could be supervised, some of which are already used by the insurance industry. For instance, one Swedish insurance provider charges a lower premium to vehicles that have an alcolock installed to make it impossible to use the vehicle for an intoxicated driver. In this report, the authors summarize some work they have done on how to incorporate two of the most important risk factors, vehicle mass and speed. (Author/publisher)
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