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DRIVER RECORD: A POLITICAL RED HERRING THAT REVEALS THE BASIC FLAW IN AUTOMOBILE INSURANCE PRICING

Surcharges or discounts based on driver records are politically promoted as a substitute for classes such as sex and territory. This paper reviews a frequently-cited industry study produced in 1979 to persuade the NAIC that Driver Record surcharges are justified for use by insurers on a discretionary basis, but cannot replace driver gender. The study's data, however, compel the conclusion that use of driver records contravenes the principle of insurance by varying prices at random. The review concludes that (1) it is not "bad drivers" but over-representation of higher-mileage cars that produces the higher accident-averages the study invokes to justify the surcharging, (2) these higher averages are evidence of the basic flaw in pricing--failure to proportion class premiums to actual miles of exposure as measured by the car's odometer, (3) unlucky lower-mileage insureds, already overcharged at the class premium, are more heavily overcharged by surcharges.