Commentary

Auto Insurance Needs ‘Auto Choice’

This article appeared in Copley News Service.

Four years ago, Christine Todd Whitman was hailed as a rising Republican star when she was elected governor of New Jersey. Her career was almost cut short this last election, however, largely due to voter anger over rising auto insurance rates.

The average policy premium jumped 44 percent between 1987 and 1994, nearly 50 percent faster than the rate of inflation. Unfortunately, the system is riven with fraud, which the FBI estimates costs every American household an extra $200 annually.

The burden falls most heavily on poorer Americans, particularly urban residents, who typically spend three times the share of income for auto insurance as do the wealthiest Americans. Some poor people spend as much as a third of their incomes to insure their cars.

That’s not all. Many of those involved in accidents receive only inadequate recompense after a long delay. The Rand Institute for Civil Justice reports that although those with injuries of less than $5,000 typically receive two to three times their actual economic damages, those who lose between $25,000 and $100,000 usually collect only about half their losses. Those suffering even higher losses average barely a 9 percent recovery rate.

At least one group emerges as a clear winner in today’s litigious society, however: the nation’s attorneys. An incredible 40 percent of every premium dollar paid to cover bodily injury and uninsured motorists goes to lawyers. The problem is both sides. The plaintiffs’ bar, which usually works on retainer, is after as large a judgment as possible, while defense attorneys use delay as trial tactic. Reform obviously is needed. Although some 15 states have approved variants of “no-fault” laws, in which companies reimburse their own customers for injuries, similar efforts elsewhere have foundered in the face of opposition from trial attorneys and other vested interests.

Now, House Majority Leader Richard Armey and a bipartisan group of senators have introduced what they call “Auto Choice.” Developed by policy analysts Michael Horowitz and Jeffrey O’Connell, Auto Choice would allow drivers to decide between their existing tort system and so-called personal protection insurance PPI. Drivers who chose the latter would receive compensation for economic damages from their own insurance carrier; they would forgo their right to sue for non-economic damages (particularly pain and suffering). However, drivers could file suit if their economic damages exceeded their policy limits or the other driver caused the accident intentionally or after using alcohol or drugs or was uninsured.

Congress’ Joint Economic Committee estimates such an approach could cut insurance premiums by about a third - or $45 billion nationwide. That would mean an average cut of $243 a year or more in high-costs states, such as California and many in the Northeast. Some lower-income drivers would see their premiums drop by nearly half. Additional savings are possible by reducing the overlap between auto and health insurance.

This initiative also ensures free choice. Not only would individual drivers be able to decide to stay under the old system, but a state legislature or insurance commissioner could opt out, if desired.

Reforming insurance is no easy task. However, Auto Choice would simultaneously increase Americans’ freedom of choice and lower insurance rates.

Doug Bandow is a senior fellow at the Cato Institute.