Finance Department

 

Date of this Version

1993

Document Type

Article

Citation

Journal of Actuarial Practice 1 (1993), pp. 51-67

Comments

Copyright 1993 Absalom Press

Abstract

Every mile traveled by a car transfers risk to its insurer. This paper posits that the product of a cents-per-mile rate based on class experience and the miles recorded on the car's odometer appropriately earns prepaid premium while the car is driven. Operation of a practical car-mile system is described briefly. To test the competing idea that driver-record pricing responds to known large differences in risk transfer, a model used to validate claim free discounts is reexamined with the car-mile as the measure of individual cost. Driver-record pricing is found to inflate car-year price-to-cost differences. Consequences of accident rate variability for a car-mile system are reviewed. The per mile cost of individual risk transfer is a class property because of the random nature of accidents. Driver-record pricing attempted on a per mile basis would amplify differences within classes.

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