Insurance by the Mile...

So during my meanderings around the internet during slow work hours, I *unfortunately* came across this article…

The point of the article was to teach people how to effectively bargain shop… that is… don’t go to about 50 stores because each one has a sale on one thing, but instead to do all your shopping at “Whichever store you feel overall on their prices is the best.” Now, this is fine, and probably correct. My issue is not with their argument, but rather, with some of their evidence.

The article sites that it costs 56.3 cents per mile to operate a 2005 Dodge Caravan. They say:

“The cost of gasoline alone is now 9.9 cents per mile for a 2005 Dodge Caravan, for a total operating cost of 16.2 cents per mile, including maintenance and tires, according to recent AAA calculations. At 15,000 miles per year, with insurance and maintenance factored in, the Caravan costs 56.3 cents per mile to operate.”

9.9 cents per mile for gas
6.3 cents per mile for maintenance/tires
+ insurance
= 56.3 cents per mile to operate

Okay, they’re assuming 15,000 miles/year. But since when has insurance been factored on miles?! Insurance is a fixed cost that they’re choosing to distribute over just 15,000 miles (a number they don’t justify as an “average mileage” or anything). Okay… they already accounted for gas, maintenance, and tires… therefore:

9.9+6.3+Insurance=56.3

Insurance=40.1 cents/mile

So your insurance is 40.1 cents/mile on average if you divide total cost by 15,000 miles. Now, in their argument, they don’t state that 15,000 miles is the average distance driven by an average family. Realistically, the more you drive, the cheaper your driving will become, according to their method.

Their fatal flaw here is including a fixed cost into their equation. Gas, maintenance, and tires are dependent entirely upon how much you drive. But insurance is a fixed cost. For an argument against driving additional miles, they shouldn’t be factoring in a fixed cost. And moreover, a fixed cost that accounts for 70% of their cost/mile calculation.

Am I missing something here?

This does, however, bring up some interesting ideas about insurance. Tim and I talked before about buying insurance by the mile. Obviously, the more you drive and the further you drive, the greater risk you are to an insurer. Why not insure by the mile?

Obviously, this is most helpful for individuals who drive a below-average amount of miles per month. This is obviously not helpful for individuals who drive an above-average amount of miles per month. So why can’t I buy insurance for 50 miles/six months. I could bring my car in and have the insurance company check my mileage and then six months later, I’d bring it back and they’d charge me for any overages then… at a high penalty, of course. Still, I would get off cheaper because 50 miles worth of insurance should, in theory, be substantially cheaper than 6 months worth of “average mileage” insurance.

So why isn’t this happening? Insurers could allow people to choose a “mileage” plan or “full coverage” plan. So maybe it is because insurers would take a huge profit hit. Lots of low-mileage drivers insure themselves for full cost currently. The question is… why doesn’t some insurer use this as their “in?” I mean, if I’m the only insurer who provides this service, I’m going to provide a very unique service. Granted, you’d have to “guess” your mileage… and you’d have to come in twice yearly to be billed… but I would do it if it saved me money!!