Why is auto insurance ridiculously overpriced for those who drive few miles?
There are several aspects to this but at a high level it boils down to A lot goes in to insurance rating and risk projecting.  You can't adjust a single variable and expect a proportional change in your premium, 7,000 miles per year just won't be 70% of the cost of 10,000 miles per year, because there are a lot of other things in play as well.  To further address premium adjustments.  Consider this: Even if your liability coverage did scale with perfect correlation to your mileage (using the same 70% from above, 7,000 miles per year versus 10,000 miles per year) then your premium composition is: $200 to $170 is 15%.  No change will have a direct linear correlation to your total premium because there are different component pieces of the total premium.  Fixed costs may be built in to the amounts for other component pieces of the premium, for example maybe no line of coverage ever has a cost below $X. Obviously these numbers are all made up Additionally, and also less considered is the fact that your liability also scales because of a lot of factors that have nothing to do with you.  It might be the other cars that are on the road, it might be that more densely populated areas have more fender benders.  For example if you live in Beverly Hills you have a much higher likelihood of accidentally bumping a $70-$80-$90-$100k+ car than you do in say, rural Wisconsin.  If your zip code is gentrifying and everyone starts buying Mercedes, your liability coverage increases.   You can not adjust one single variable and decide that you are lower risk than all insurers think you are.  If you shop this coverage and all insurers are within a nominal margin of pricing for the same coverage levels, there isn't much to argue with; you are simply riskier than you think you are and the variable you are focused on is not as meaningful as you think it is. Not all miles carry the same amount of risk. A survey by Progressive indicated that accidents are most likely to occur within 5 miles of home, and 77% of accidents occur within 15 miles of home. Only 1% of accidents occurred 50 or more miles from home. That's from 2002, but it seems unlikely to have changed much. Since the miles closest to your home carry more risk, they cost more, and low-mileage discounts reflect that. There are per-mile insurance options in a few states which could save you money, but they do constant monitoring via that ODB2 telematics device, and other insurers offer discounts if you accept their monitoring either in perpetuity or for a limited period of time.  Without monitoring, insurers don't know if that 4,000 miles of driving is spread into a few mid-day trips each week, or maybe you're doing all that driving from midnight to 4am on weekends (fatalities far more likely), or from 5-7pm during weekdays (accidents far more likely). Personally, I save ~10% by being a 'low-mileage' driver, and am currently in the middle of a 90-day monitoring, so might go lower, but given that accidents are far more likely close to home, 10% feels pretty significant and appropriate. 4000 miles a year is not a few! European average is about 9000... But nevertheless... But when it comes to risk, then: 1) Nothing stops you from changing circumstances and drive 10 times as much as in previous yers. The insurance remains the same. The only thing the insurance company can do is to charge you more next year (taking the miles you've made this year as a basis for calculations)* 2) Drivers who drive very seldom are a huge risk because of their low experience. I know a few people that drive more than 100 miles only a few times a year, and on average once a year have accident during that drives. It doesn't mean that an average sunday driver have similar risk of accident as daily driver, but it's in no way similar.  *) Germany/Switzerland based, the whole EU is likely to be the same Many services charge prices that do not scale linearly with usage.  This is because the service provider has fixed costs that they must recoup by charging a rate with a fixed component.  A 5-mile taxi ride is unlikely to cost half what a 10-mile taxi ride costs.  Even a half sandwich at a sandwich place usually costs more than half of what a full sandwich costs.  In this respect, insurance is no different from many other items you may purchase. Some proportion of the costs of a policy have little to no relationship to miles driven.  Think of costs of underwriting, and more especially sales/marketing/client acquisition costs (auto insurance isn't in the same league as non-term life insurance (where the commissions and other selling expenses typically exceed the first year's worth of premiums), but the funny TV ads and/or agent commissions aren't free), as well as general business overhead. Also, as noted by quid, some proportion of claim risk isn't correlated to distance covered (think theft, flood, fire, etc.). There are also differences in the miles that are likely to be driven by a non-commercial/vehicle-for-hire driver who puts 25k miles a year vs. one who puts 7k per year.  The former is generally going to be doing more driving at higher speeds on less-congested freeways while the latter will be doing more of their driving on crowded urban roads.  The former pattern generally has a lower expected value of claims both due to having fewer cars per road-mile, fewer intersections and driveways, and also having any given collision be more likely to result in a fatality (paralysis or other lifetime disability claims are generally going to exceed what the insurer would pay out on a fatality). Other people lie to the companies about how many miles they drive, so they can't take the mileage figures literally.   You aren't specifying whether you want liability only, or more-comprehensive insurance.  Stuff happens when you aren't driving.  Cars get stolen.  Other drivers hit parked cars and leave.  Trees fall on parked cars.   Move to Virginia where insurance is not required.   Just pay $500 a year for not having insurance, and be careful. First you have to understand that insurance is basically a social system, just with Shareholders. Insurance costs consist of 3 factors: Now, to encourage a low-risk behavior a separating factor is search in the vast amount of statistical data. Drivers experience, miles and type of car being the most common, but also other things like oldtimer-status etc. are possible. If it so happens that the 3-5000 miles driver do only in average have 80% of the damage-costs of a comparable group 5-8000 miles driver, you´ll get the 20% bonus on factor 1.  So the answer is, it is not overpriced, there is just no linear relationship to mileage. You can´t divide your insureds in too many groups or you´ll miss the mutual aspect of insurance. If everybody just pays his own risk, he can just do so in his bank and save on overhead and profit. There is plenty of over-rationalisation in the majority of these answers, when the simple answer is that it is simply down to statistics. Say an insurer had two pieces of information about two separate drivers: annual mileage, and whether they had had an accident in the last 3 years. Driver A drives 10,000 miles a year and hasn't had an accident in the past 3 years. Driver B drives 500 miles a year and hasn't had an accident in the past 3 years. Which would the insurer think was the safer bet? The answer is A, and this makes his premiums lower. The reason for this is that the insurer has a lot more data about Driver A than Driver B: they know that Driver A has driven 30,000 miles without having an accident. This could, of course, be luck, or a fluke, but it is likely that Driver A is actually a safe driver. The chance that Driver A hasn't had an accident just through sheer luck and that they are actually a terrible driver is quite slim. On the other hand, Driver B has only driven 1,500 miles in the past three years. Whilst this seems like prima facie evidence of them being as safe a driver as Driver A, it is much more likely that Driver B could have driven 1,500 miles and avoided an accident through sheer luck, even though they are a terrible driver.  This means drivers who drive low amounts of mileage will be penalised relative to other drivers who have high mileage. It has nothing to do with insurers taking a judgement that 'doing more mileage makes you more experienced' or 'makes you a better driver' as others have suggested here (although, it is probably true - it's not quantifiable from an insurer's perspective). because it cost the insurer more, obviously. while this sounds snarky, it's important to realize that actual insurance companies set their insurance rates based on actual historical costs. for some reason people who report low miles have cost the company more dollars per reported mile than people who report high miles. in that sense, insurance is not overpriced. if it were truly overpriced, then an insurer would specialize in such insurance and make a killing on the free market. the more interesting questions is why do drivers who claim to travel very few miles cost the insurance companies so much per mile? that question has a host of possible answers and it's difficult to say which is the largest cost. here are just a few: "One reason is because car insurance is mandated. Mandated insurance means the government is forcing people to purchase it, which also means that everyone must have the opportunity to purchase it at a reasonable cost, even if the insurer would normally not choose to insure them. In mandated industries, risk pools are formed which means that as a whole, lower risk members partially subsidize higher risk members. In mandated industries that have a large risk variance, the insurance system would break down if everyone was charged their ""fair share"" because high risk members would be unable to afford a policy. (This is even more prominent with health insurance than car insurance because the difference in risk is vastly greater.) On a positive note, perhaps you may get a warm and fuzzy feeling knowing that you are helping out others ""in need""." Insurance rates are about assessing risk.  If the insurer has no way to reliably and easily assess usage, they will not reduce the premiums.  Many companies are providing tracking devices that connect to the OBD-II port. This not only tracks actual miles driven, but can typically track aggressive driving, time of day, length of trips, and other information. Unless you are using this kind of device to give the insurer actionable feedback on your driving habits, do not expect any discounts for mileage or usage. People who drive long distances tend to do more of their driving on larger, well-built roads (freeways / motorways) that are designed for high-speed driving. Although some people find them intimidating, they are much safer in terms of accidents per kilometre driven for several reasons:
"In practical terms, these days, a credit union IS a small ""savings and loan"" bank -- the kind of bank that used to exist before bankers started making money on everything but writing loans. They aren't always going to offer higher interest and/or cheaper loans than the bank-banks, but they're almost always going to be more pleasant to deal with since they consider the depositors and borrowers their stockholders, not just customers. There are minor legal differences (different insurance fund, for example), and you aren't necessarily eligible to open an account at a randomly-chosen credit union (depending on how they've defined the community they're serving), but they will rarely affect you as an account holder. The main downside of credit unions is that, like other small local banks, they will only have a few branches, usually within a limited geographic area. However, I've been using a credit union 200 miles away (and across two state lines on that route, one if I take a large detour) for decades now, and I've found that between bank-by-mail, bank-by-internet, ATM machines, and the ""branch exchange"" program (which lets you use branches of participating credit unions as if they were branches of your own) I really haven't felt a need to get to the branch.  I did find that, due to network limitations of $50K/CU/day, drawing $200,000 worth of bank checks on a single day (when I purchased the house) required running around to four separate branch-exchange credit unions. But that's a weird situation where I was having trouble beating the actual numbers out of the real estate agents until a few days before the sale. And they may have relaxed those limitations since... though if I had to do it again, I'd consider taking a scenic drive to hit an actual branch of my own credit union. If you have the opportunity to join a credit union, I recommend doing so. Even if you don't wind up using it for your ""main"" accounts, they're likely to be people you want to talk to when you're shopping for a loan." While JB King says some useful things, I think there is another fundamental reason why stock markets go down after disasters, either natural or man-made.  There is a real impact on the markets - in the case of something like 9/11 due to closed airport, higher security costs, closer inspections on trade goods, tighter restrictions on visas, real payments for the rebuilding of destroyed buildings and insurance payouts for killed people, and eventually the cost of a war. But almost as important is the uncertainty and risk. Nobody knew what was going to happen in the days and weeks after an attack like that. Is there going to be another one a week later, or every week for the next year? Will air travel become essentially impractical? Will international trade be severely restricted? All those would have a huge, massive effect on the economy. You may argue that those things are very unlikely, even after something like 9/11. But even a small increase in the likelihood of a catastrophic economic crash is enough to start people selling. There is another thing that drives the market down. Even if most people are sure that there won't be a catastrophic economic crash, they know that other people think there might be and so will sell. That will drive the market down. If they know the market is going down, then sensible traders will start to sell, even if they think there is zero risk of a crash. This makes the effect worse. Eventually prices will drop so far that the people who don't think there is a crash will start to buy, so they can make a profit on the recovery. But that usually doesn't happen until there has been a substantial drop. "I usually recommend along these lines.  If you are going to drive the same car for many years, then buy. Your almost always better to buy, and then drive a car for 10 years than to lease and replace it every 2 years. If you want a new car every two years then lease. You're usually better off leasing if you're going to replace the car before the auto loan is paid off or shortly there after. Also you can get ""more car"" for the same monthly money via leasing. I honestly would advise you to either buy out your lease, or buy a barely used car. Then drive it for as long as you can. Take the extra money you would spend and spend it on an awesome vacation or something.  Also, if you're only driving 15 miles a day, then get a cheap, but solid car. Again, just my advice." "&gt; You failed to address the part where I said Tesla wants major car companies to compete. That has been the entire point all along, from the very start. And competition would be good for Tesla, because instead of Tesla alone having to spend resources on educating the ignorant public (e.g. you), this way other auto manufacturers would be able to help. And Tesla would have other yardsticks to compare to, and to say ""see, we're better than them."" Tesla welcomes this.   I didn't address it because there is no need to.  For the electric car industry to work as a whole yes there needs to be more competition.  TESLA's competitors, however, are going to wipe the floor with TSLA because TSLA is committing massive capital to old tech.  &gt; Auto companies are behind the times because they've outsourced nearly all of their engineering expertise. They are good at volume production and engines. That's most of what's left of any major auto manufacturer. So take away the engine, and they have nothing. To make a compelling EV, they need to start from scratch, and it takes years to develop a car. This is why competition hasn't come, and why compelling competition isn't coming. The only companies with somewhat compelling offerings are those who started very early - BMW and Nissan - or those who have partnered with Tesla - Mercedes and sort-of-Toyota. Porsche has a chance since they still have engineers, but they're dragging their feet. Everyone else is basically fucked. And not just because of the lack of engineering, but because of the nature of large companies. It takes a lot to right a large ship.  I'm not sure how to answer that.  It's all just speculation.  The competition is waiting for the first big mover to do just what TSLA is going.. being the first mover, then coming in and wiping the floor with them.    &gt;Companies will be loathe to release compelling EVs because they will compete against themselves, they will have to advertise the EVs as if they are better than their gas offerings which still make up 99% of their sales. This puts them in a sort of paralysis and they can't do anything about it. Someone is going to take bites out of their market share, and it's either going to be them or it's going to be Tesla.  That's just silly.  Car companies are in the market to sell cars.  Every new car model competes with an existing model.      &gt; In the real world there is specialization. Some companies design cars, others design batteries. &gt; Have you seriously never heard of vertical integration? My previous paragraph talks about the perils of the sort of specialization you're talking about. Because automakers have spun off all their expertise, they are not nimble enough to compete in a changing market. Vertical integration is not the answer to everything, but it is a very good way to make your company nimble and keep costs down if you can do it. That's what Tesla is aiming for. It's not a new concept...and the fact that you've never heard of it ""confirms my view that you don't understand the issues.""  If you want to argue that all of the last 30 years of free markets and the value of specialization is wrong, go ahead.   &gt; THE ACTUAL BATTERY COMPANIES wouldn't do it. But you think Musk knows more about batteries than the actual battery companies. &gt; Tesla has particular expertise about automotive batteries, yes. They do their own battery research and have their own IP and patents (which they've opened) related to it. And they have a partner, Panasonic, who is the leader in batteries. Did you know that? Did you know that Panasonic is partnering in the battery factory? Because it sounds like you didn't, which ""confirms my view that you don't understand the issues."" &gt; Panasonic is partnering in their battery factory, and will be responsible for much of the production. And Panasonic has been making quite a tidy profit on their battery manufacturing for several years thanks to Tesla.  They are committing massive capital to old technology.  That's a loser play, but it will help the industry as a whole and those that are going to come in with the next generation of batteries while TSLA is stuck with massive capital in lithium ion.   &gt; &gt; Literally in the same exact call that this article is about, on the same day, Panasonic and Tesla announced that Panasonic is spending massive capital for a plant to supply TSLA cars. Not only have they increased production at their own plant tremendously over the course of the last few years, they will end up spending a billion dollars on the Tesla plant.So no, you really, really don't understand it.   ""We haven't decided yet on the specifics of when or how much investment we will be making,"" Panasonic Chief Financial Officer Hideaki Kawai said at a news conference in Tokyo.  (http://www.marketwatch.com/story/panasonic-to-help-build-tesla-battery-plant-2014-07-31-84851841)  It seems Panasonic is not as optimistic about the plant as you are.  So the question is, why bother the big fanfare about a plant when all it is is a rough idea?  To keep the sucks putting up money." Insurance is for events that are both and Unexpected and, for many people, catastrophic events are, for example, sickness, disability, death, car accidents, house fires, and burglaries, for which you may buy health, disability, life, auto, home, and renter's insurance.  It may be catastrophic for a family relying on a very old earner for that earner to die, and you can buy life insurance up to a very old age, but the premiums will reflect the likelihood of someone of that age dying within the covered period.  The more expected an event is, the more anything referred to as insurance is actually forced savings. Health insurance with no copays on regular checkups expects the insured to use them, so the cost of those checkups plus a profit for the insurance company is factored into the premiums ahead of time.  A wooden pencil breaking may be unexpected. Regardless of foreseeability, no one buys insurance on wooden pencils, as the loss of a pencil is not catastrophic. What is catastrophic can be context dependent. Health-care needs are typically unforeseeable, as you don't know when you'll get sick. For a billionaire, needing health-care, while unforeseeable, the situation would not be catastrophic, and the billionaire can easily self-insure his or her health to the same extent as most caps offered by health insurance companies. If you're on a fixed budget buying a laptop, if it unexpectedly failed, that would be catastrophic to you, so budgeting in the cost of insurance or an extended warranty while buying your laptop would probably make sense. Especially if you need that $2000 laptop, spending an extra 17.5% would safeguard against you having to come out of pocket and depleting your savings to replace it, even though that brings you to a grand total of $2350 before taxes. However, if you're in that tight of a situation, I would strongly recommend you to find a less expensive option that would allow you to self-insure. If you found a used laptop for much less (I can even see Apple selling refurbished Macs for less than $1000) you might decide that your budget allows you to self-insure, and you could profit from being careful with your hardware and resolving to cover any issues with it yourself. This person could buy another car at any moment without any money problems, so I don't really see any point in insuring, especially with such a ridiculously high price compared to the extremely low risk. Convenience.  If you self-insure, then an accident means that you have to make arrangements to get the car towed, fixed, evaluated, etc.  If you buy insurance, your insurer would prefer to do all that.  They argue with the mechanic over prices, the lawyer over liability, etc.   And of course, rich people need more liability insurance than other people, not less.  So part of that $1400 is probably money that your friend would have to pay regardless. Except most people's insurance doesn't allow them to use their personal vehicles for business purposes.  If they had a package to be delivered in the car and get in an accident than insurance will not pay out anything. The real test of AAA's analysis is whether other insurers follow suite. Setting insurance rates is a balancing act between being high enough to make money given the expected payouts, and being low enough to not get undercut by competitors. If other insurers follow AAA's lead, then their analysis is probably right. If other insurers stay low than AAA probably made a mistake. When you price insurance on a given car it's not uncommon to have an outlier that overpriced that car.