Driving in the USA

Last week I visited Princeton for the summer music course I usually attend, a marvelous week once again. Princeton is about two hours away, though very dependent on traffic, so I find it too far to commute but not so far to justify spending the entire week away from the family. So typically I stay over alternate nights, which results in me driving one direction each day.

Even so, this becomes the week with most time I spend driving my car. It wears me out somewhat; especially hacking through Manhattan and in lines approaching bridges and tunnels. And each year, I reflect on the millions of people for whom this is a daily experience through their working lives. I am so lucky that this has never applied to me – one of life’s blessings that is easy to overlook.

When not distracted by a few mechanical issues and near misses, my driving thoughts this year were mainly about car insurance. We are with GEICO, initially chosen as a result of awareness from their huge TV advertising budget. To be fair, their ads are pretty witty.

I’ve started to learn a bit more about how car insurance is priced in the US. GEICO initially charged us quite a bit, but the fees went down quickly after we built up a clean US driving record. But then our kids turned 17, and we had to decide whether to include them, even though they hardly drive. We include the child who will continue to reside here, hoping that he will eventually benefit from his own clean record. But putting an 18-year-old boy onto the policy, even as an occasional driver, more than doubled the premium.

So I shopped about a bit, including online firms. That was interesting. Initially I just submitted for an e-quote for my wife and me, and it came out at about half of Geico’s equivalent quote. Then I included the 18-year-old, and that multiplied the quote by six, so substantially more than Geico.

So I tried to make sense of all of this. Car insurance didn’t vary so wildly in price when I was younger. What has happened is the power of the market, with more competition and better information. Algorithms have taken over.

Car insurance in the US is certainly a competitive market, just judging by the number of firms with TV advertising budgets and offering discounts. But it is also something of a special market, because it appears that all firms seem to have access to similar basic information. It is uncanny how much Esurance knew about me and my car and my driving habits, even before I had given them any information. It seems that this information is pooled.

So the companies try to gain competitive advantage by employing smarter algorithms, attracting customers whose likely cost in payouts would be less than their income from premiums. And, as we can surmise, the claim likelihood from an 18-year-old boy is a massive multiple of that from a 50’s couple. Indeed, factor in age, gender, type of car, address, annual mileage and driver history and you can model very different risk scenarios and price accordingly.

At first glance, this is great, because a competitive market is doing its job and offering the correct incentives and rewards. But the outcomes can be crippling for those who can least afford it, like so much in the US. Imagine if our 18-year-old was in the South Bronx, and maybe had some criminal convictions and poor credit, and perhaps drove something less staid than a Volvo, and then had a smash?

Well, we don’t have to imagine, we can already see what happens. Note that insurance is a big part of the cost of driving in the US. Leases and gasoline are cheaper than Europe, but insurance has to cover higher legal and medical risks. Those mega-payouts earned by those other TV-hogs Cellino and Barnes have to come from somewhere, and that somewhere is our insurance premiums.  

So I had often wondered why there were so many Pennsylvania and Florida registered cars on New York roads. I had thought it might be something about sales tax, but now I think it is insurance. These people are telling their insurance company that they are based somewhere with lower premiums. Of course, the ruse will be very vulnerable if they have a major claim in New York and their insurer starts to research their driving history.

Next, our kid in the South Bronx decides to dispense with insurance. Who can blame him really? He probably needs to drive to be employable, yet insurance alone would cost most of his income. Of course, then he has a smash, and he is really screwed, perhaps for life.

The Economist, alert as ever, researched exactly this story in Detroit and other poor towns in Michigan. Because the local legislature added in even more potential medical liabilities, car insurance there has become progressively less affordable; so most people drive without, making it even more unaffordable for the rest. Like city rents and employment penalties, it becomes one more catch 22 for young people from disadvantaged backgrounds, and one more part of the cycle of doom for their cities.

So markets and algorithms have done their job, but the consequences are not all good. It can work the same with things like medical insurance, and indeed many seemingly unrelated fields like recruitment profiling.

What about solutions? Well, we can’t go back to a world with worse information. So the only immediate solution comes through taxes and benefits. It is hard to defend politically, but if we really want to create a level playing field of opportunity, these kids and these towns need to be given some extra help.

In the US, it would also help if accident chasers and medical firms did not succeed so often in their lobbying, and medical and compensation bills became more reasonable as a result. We can whistle in the wind for that one. 

In the medium term, this problem will get worse, because information will become ever more available. It won’t be long before the Florida registered brigade will be foiled by sensors in cars, whereby insurers will know their habits, and price them, even before there are claims.

But, at least for car insurance, there is potentially a happy ending. In twenty years time, we won’t need cars at all, but can glide about in ubiquitous autonomous vehicles. No doubt lobbyists will find a way to favour corporations over kids from the South Bronx in this area too, but we can at least expect the playing field to become a bit more level than it is now.

If the course will still accept my application, I expect to visit Princeton again next summer and expect to drive once again, and to become even more familiar with the bottlenecks of the belt parkway or Lincoln tunnel approach. Credit where it is due, this year the situation around some bottlenecks had been improved. Probably my car insurance bill will be little changed in a year’s time. But some of those musicians are younger than I am, so must have hefty bills to pay. Perhaps they have wealthy parents, or mysterious second homes in unlikely states.