Smile, Your Car is on Candid Camera
One of the classic Econ 211 lessons (it is coming) is how problems are created in markets when buyers and sellers have different sets of information at their disposal. Economists call this situation “asymmetric informationâ€. An important example is insurance markets.
First, the background …
Imagine there are only two types of drivers – “risky†drivers and “safe†drivers. An asymmetric information problem exists in the auto insurance market. Drivers know more about their proclivities to engage in risky activities than do the insurance companies. Consider how often you use your seat belt, cell phone, drive fast, drive drunk, drive not that drunk, or other unmentionable driving distractions. Your insurance company has little information about these activities.
Ignore the legal minimum coverage requirement and imagine an insurance company that charged only one price to all of its customers, one that corresponded to the risk level of the average driver. Would this work out?
Consider the drivers. Risky drivers would find this price to be a good deal. As risky drivers, they should be paying higher premiums that reflects their higher level of risk. As the price they are being given reflects the risk level of the average driver, this price will be attractive to these drivers.
On the other hand, a safe driver would not find that price attractive, and might not buy insurance at all.
From the perspective of the insurance provider, this turns out to be a lousy idea. They will find this price attracts many risky drivers and few safe drivers (called an adverse selection problem). As a result, they will have an incentive to attempt to acquire information concerning what type of driver their customers are. They will charge drivers different prices based on their risk level. Essentially, they try to reduce the asymmetric information problem. This is why they ask you all those pesky questions about how many tickets and accidents you have, your age, the type of car you drive, whether you are a homeowner, or even what your credit score is.
So this is all old hat and found in any textbook – what is interesting to me is that it is quite likely that safe drivers have an incentive to show insurance companies they are indeed safe drivers. Now, anyone could lie and say they were a safe driver. But how can someone credibly show their insurance company they are a safe driver?
Not have accidents for one, but the article provides another answer. Basically, a camera system mounted on the dashboard records what is happening in front of and behind the car, filming constantly. The device only stores the film for the few seconds before and after the car brakes or accelerates rapidly.
Drive safe, avoid sudden starts and stops, nothing is stored. Drive like Bob Huggins or Paris Hilton, there will be a lot of film.
If the costs is low enough, I think this will catch on. It will be interesting to see if the big talkers about how important privacy is will be willing to put their money where their mouth is.
–CT
What if I am right, and these devices do catch on? Suppose you are a risky driver, and thus you choose not to stick the cameras in your car. Is an insurance company learning anything about you?
March 21st, 2007 at 9:20 pm
> What if I am right, and these devices do catch on? Suppose you are a risky
> driver, and thus you choose not to stick the cameras in your car. Is an
> insurance company learning anything about you?
There are advantages in such a system, but only if it is remembered that they provide only one aspect of insight into a driver’s actual risk profile.
Example – just this week British Courts erased a driver’s ban & fines for speeding. He was filmed at 158 mph on the motorway.
The film was absolutely damning, and the driver admitted the offense.
So why did the courts lift the penalties?
because the driver was a Police “Grade One” driver – someone trained to drive to an extraordinary level of performance, and the judge rightly concluded, there was no demonstrated undue risk.
As a driver who has done hundreds of hours of advance driving safety training, should I get a “free pass” by having done every bit of training possible to reduce my driving risk?
Should I get a free pass to drive at speeds I know are within my safe skill levels?
Or should I too be subject to having Big Brother in my car with a camera system?
The Insurers have a complex set of issues, but as the black box cameras are only indicators of past actions, and not necessarily predictive of future driving situations, the idea might not fly.
Only if the past truly defines our future do these cameras offer any predictive assistance.
I for one rather hope they don’t, as they would have recorded the two buck deer I ran over at full tilt in the dark. Afraid these beasts only have Darwinism to teach them how to cross the roads!
Steve
April 5th, 2007 at 8:54 am
I do not necessaryly agree with the system making this person a better driver, and that is done by choice. Just the way a 16 year old will drive different with his parents in the car then his friends. Simple maturity isnt there. This test was done on an 18 year old senior who is at the age that maturing and preparing for the real world is setting in very fast.
Another thing is how will they rate the amount of high risk the driver has taken? In some cases the individual has been driving his car, he knows the rate it can stop, he knows the rate he can accelerate to move lanes to move in and out of traffic, the car companies do not. A person can be a high risk driver (myself) and not get any tickets or in any accidents (knock on wood) and avoid accidents for years or perhaps even forever. You cannot predict the future before it happens, and that is what the insurance company is trying to do with these systems. So why should this individual have to pay the higher rate when they havent done anything wrong yet? It is almost like the movie minority report, they are pretty sure that a murder will happen, but cant prove it so they arrest them. In this case, they think they have a greater chance of getting in an accident before they have ever gotten in one, therefore they get charged a higher premium.
April 19th, 2007 at 11:40 am
If my insurance company were to make me put a camera in my car to video tape what was going on, then I, like most people, would act different. The reason for this is to make it seem like I am a safe driver and I can get a better rate for my insurace. I know when I went looking for my insurance I wanted to best deal. This means I went somewhere where I would be considered a safe driver and would not pay as high as a risky driver. I know the older you are and less amount of tickets and accidents you get in the cheaper your insurance is, which is great.
May 1st, 2007 at 5:18 pm
I feel the drive-cam would be a great learning tool for teenagers to aquire some knowledge of driving and their surroundings. By having this device installed in their vehicle it will allow them to be focused more on driving safely because they will not want the device to record their bad driving habits. Producing the drive-cam would be good for society because the drivers with the device in their vehicles will be more aware of their surroundings and will be less likely to get in a car accident. While the drivers with no camera in their vehicle will not have any reason to be safe because no one will ever know if they are a being a safe driver. The insurance companies will be able to give better car insurance prices if they know exactly how their insuree is driving. This device is a great tool for deciding who is at fault if you get into a car accident. On the other hand after a while the driver may forget about the drive-cam and just drive how they choose. That would lead to a waste of product. Overall I think the drive-cam is a good thing for society to have.
May 10th, 2007 at 11:53 am
I think this idea has the best intentions but I dont think it will ever catch on. Many people have a hard time paying for insurance now, then to add the price of putting cameras in there cars. For those people that would get the cameras in there cars I think that there driving would become safer because they would know that theere insurance company is always monitoring them. I think it is a good idea, but it would just all depend on the price if it would ever catch on.