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AN ALTERNATIVE TO THE HIGH-RISK-DRIVER THEORY: ADVERSE SELECTION INDUCED BY PER-CAR PREMIUMS

To address the puzzle, this paper: 1) Sets out the facts of high annual risk and high premiums; 2) Considers problems with the accepted high-risk-driver theory used to explain these facts; 3) Proposes as an alternative theory that the pools of cars averaging high-annual-risk result from adverse selection induced by dollars-per-car premiums; and 4) Specifies the free-market centsper-mile remedy that the alternative theory indicates, and identifies the reason for insurer resistance to it.