Smaller cars and insurance basics

Last week I posted some thoughts on the allocation of responsibility for risk to small car occupants between the owners of smaller and larger cars. Megan McArdle correctly notes that small cars are overall more dangerous than large ones, and not only because of the large ones, and correctly notes something even more important, which is that we are not going to get climate stabilization (or many other things) right if we don’t recognize (i) tradeoffs of important stuff against other important stuff (ii) that in the second category is extending lives. In the second category, not ‘the only thing that matters’.

I. Let’s go over that last part again: what we need to do to stabilize the climate will be costly. Some people in some places will make out well from green businesses, but it will overall be costly. Among these costs will be that some people will die earlier than if we don’t try to save the planet. We will incur these costs (if we choose to), because we think the costs will be greater – including lots more people in the future dying earlier – if we don’t. Climate stabilization is not free, not cheap: it’s expensive and worth it.

II. Small cars intrinsically allow less space for the vehicle to collapse around passengers, therefore less deceleration distance, therefore more g’s or more crushing people. However, design can make a lot of difference (locating vehicle mass, body geometry, padding and airbags, etc.). The relative risk deficit is larger the smaller the thing you collide with. That is, if a Mini and a Hummer collide with (i) a bridge abutment (ii) a dump truck (iii) a Civic, the relative damage to the Mini compared to the Hummer will be greater in that order (greater in case iii). This is a separate issue from the damage share between two different sized vehicles hitting each other: it remains true that large vehicles put smaller vehicles at greater risk than small ones do.

UPDATE: A reader points me at an interesting study from 2002, which finds that

The safest subcompact (Civic and Jetta) and compact (626 and Altima) car models are as safe to their drivers as the average SUV (see Figures 2 and 3, and Table A5 in the appendix). When one considers the combined risk, including those killed in the other vehicle in two-vehicle crashes, then the safest subcompact and

compact models are actually safer than the average SUV. Moreover, the combined risk for the average subcompact or compact car (147 and 136, respectively) is only slightly higher than that for the average SUV (129).

III. Megan also has a comment about the insurance industry (its association, the IIHS) that is wrong in an interesting way.

The IIHS is, of course, a corporate funded organization–but it’s funded by insurance companies that don’t like paying accident claims for severe injuries and deaths.

She’s right that the companies don’t like paying after they’ve sold a given policy. They may or may not “like” paying claims in general. But the economic health of the insurance industry depends on more losses, not less. To understand this, consider their eagerness not to have all their claims for health care brought to zero by a single-payer national health system: no claims, no business.

The revenue of any line of insurance, in a market with competition, is the long-term expected average losses, plus an add-on percentage for profit, less a reduction for investment earnings. Less losses and sales go down, and with them profits. So it’s important to understand that to the extent that IIHS actually reduces injuries and deaths from cars, the little money it puts in its members’ pockets in the short run gets taken out, and more besides, as rates adjust to the new loss statistics. If injuries and deaths were reduced to zero, a large piece of the auto insurance business would simply evaporate, just as the mule-kick insurance companies faded away when there were no more mule-kick deaths to insure against. How the clear incentives affect actual insurance company, or IIHS, behavior, I don’t know.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.