Auto Insurance and Society

1
Auto Insurance and Society

• Lecture 11

2
Compensation of Victims

• Financial Responsibility laws
• Compulsory insurance laws
• Unsatisfied judgment funds
• Uninsured motorists coverage
• No-fault insurance

3
Financial Responsibility Laws

• Does not require proof of financial
  responsibility until after driver has first
  accident or certain offenses. (DWI)
• Demonstrate financial responsibility by having
• Insurance policy with adequate limits
• Posting Bond
• Depositing collateral
• Only Takes away driving privileges victims may
  not be indemnified for injuries

4
Compulsory Insurance Laws

• Evidence of insurance required to license or
  register auto
• Study found
• Drivers do not buy keep insurance over longer
  term
• Substantial numbers still operate without
  insurance
• Claim frequency and losses associated with
  financially irresponsible drivers continue to
  increase in those states requiring coverage
• Premiums may be higher in these states

5
Compulsory Auto Limits by State
6
Unsatisfied Judgment FundUninsured Motorist

• Five states have funds for compensating accident
  victims who have exhausted other sources must
  have succeeded in suit
• Uninsured motorist discussed previously
• Free-market equivalent of unsatisfied judgment
• Do not have to take uninsured driver to court
• Limited to states compulsory requirements unless
  higher limits purchased
• Some states require others voluntary

7
No-Fault Insurance

• Each party collects from his/her own insurer
  regardless of fault
• Pure No-Fault accident victims cannot sue,
  regardless of amount of claim no state has
• Modified no-fault claims below a dollar
  threshold must be collected from your insurer
  can sue if claims exceed threshold majority of
  states w/ no-fault are modified

8
No-Fault Insurance

• Add-on plans provide additional benefits on a
  first party basis but still allow the injured
  party to sue the party at fault
• Choice no-fault motorists can elect to be
  covered under no-fault plan with lower premiums,
  or can retain right to sue in tort system w/
  higher premiums

9
No-Fault Benefits

• Medical
• Loss of earnings
• Essential services
• Funeral expenses
• Survivors benefits
• Restrict right to sue
• Exclude property damage (ex Michigan)

10
Pros No-Fault

• Often difficult to determine fault
• Inequities in claim payments small overpaid
  large underpaid no-fault matches pymt with
  economic loss
• No-fault reduces transaction costs (atty fees)
• Fraudulent and excessive claims
• Premiums excessive in some parts of country
• No-fault generally pays claims faster

11
Distribution of Bodily Injury Payments
12
Vehicle Insurance as of HH Income
13
Net Payment to Bodily Injury Claimants
14
Auto Insurers Avg. Expenditure by State, 1997
15
Auto Insurers Avg. Expenditure by State, 1997
16
Cons No-Fault

• Defects of tort system exaggerated
• Efficiency and premium gains exaggerated
• Court delays not universal
• Safe drivers may be penalized
• No payment for pain and suffering
• Should simply reform existing system

17
Insurance for High Risk Drivers

• Insurance plans each insurer assigned
  proportionate share of high-risk drivers
• Joint underwriting associations companies pool
  business share losses/expenses
• Reinsurance facility insurer transfers to a
  reinsurance pool
• Maryland auto insurance fund
• Specialty insurers

18
Insurance Premium Factors

• Territory
• Age, gender, marital status
• Use of auto
• Driver education
• Good student discount
• Number type of autos
• Individual driving record

19
Accidents by Age of Drivers, 1998
20
Motor Vehicle Deaths per 100,000 Persons by Age,
1998
21
Shopping Tips
22
6-month premiums, Omaha, Neb.
23
6-month premiums, Omaha, Neb.
24
Government Regulation

• Rating factors some states restrict use of
  gender and/or marital status
• Rating factors are filed with state commission
• Underwriting criteria proprietary factors used
  to price policies
• Goal match premium w/ expected cost

25
Government Regulation

• Why not let insurer charge rate commensurate with
  expected cost?
• What is advantage to insurer (insured) from
  letting insurer specialize in certain segments of
  the market?
• Credit scoring people with poor credit history
  tend to have higher claim costs