Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

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Friday, May 20, 2005

Age and Sex Discrimination in Auto Insurance Premiums

The usual argument made by economists for charging young men higher auto insurance premiums is that, on average, as a group, they tend to have more accidents than older drivers and female drivers; not charging them more means that older drivers and females would be subsidizing the insurance for these young males. A very sensible argument. Except in Newfoundland.

A driver's age, gender or marital status will not affect insurance premiums in Newfoundland and Labrador under new rules that the government wants in place by August. The province's Government Services Minister Dianne Whalen announced the changes on Thursday, saying they could save young drivers up to 46 per cent a year on insurance fees.

"It isn't fair: 85 per cent of young drivers who do not have accidents have to pay huge premiums for the 15 per cent who do," she said.
What a doink*. That happens with everyone who buys insurance but doesn't have a claim. And she says, "It isn't fair..."????

Who is going to pay the extra for insuring young people, keeping in mind that lower auto insurance rates mean that more young people will begin to drive and have even more accidents if their rates are lowered? Will everyone else's rates go up? Nope. In Newfoundland, auto insurance is akin to a regulated public utility:

Whalen said insurers will have to justify any future increases to Newfoundland's Public Utilities Board.

She said the alterations are based on profits the companies reported to the board.
"We see that they can afford these decreases," said Whalen.

Canadian insurance companies reported a $4.2 billion profit in 2004.

Several provinces have announced changes in the wake of public fury over the enormous earnings...

The Newfoundland government has already ordered reductions averaging 15 per cent.

There is another, much better solution. Let the market work.

Encourage entry by lots of different insurance companies. Invite foreign insurance companies to set up shop in the province. Competition between the companies will keep rates down near an actuarially fair level. They may earn large profits in some years but these windfalls will be offset, on average, by large losses in other years.

The only role for government in this industry might be to ensure the companies are on solid financial ground and do not engage in false advertising. That isn't the direction the provinces of Canada are headed, though.

My prediction: within ten years the gubmnt of Newfoundland will have taken over the auto insurance business, and general taxpayers will be subsidizing the driving by high-risk drivers by providing them insurance at less-than-actuarially-fair insurance premiums.

Update: Brian Ferguson has a much more detailed discussion of this article at A Canadian Econoview.

*Doink: someone who clearly has no idea about economics or probabilities; the de facto equivalent of socionomologist.
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