Understanding What Happened to No-Fault Auto Insurance
Over the Past Two Decades
In the 1970s, many policymakers and analysts believed that no-fault automobile insurance—in which an automobile accident victim seeks recovery from his or her own insurer instead of from another driver—would be a superior recourse that would displace conventional, tort-based automobile insurance policies and reduce insurance costs. Between 1970 and 1977, 27 states enacted no-fault laws, and no-fault had the support of many insurers, consumer groups, and academics.
However, despite its promise, the no-fault approach has fallen out of favor over the past 20 years. Several states repealed their no-fault laws and returned to the traditional tort system. Similarly, efforts to pass federal no-fault legislation stalled. What happened? Drawing on 20 years of data that allow comparisons of different insurance regimes across states, a RAND Corporation study compiled the most comprehensive retrospective of the U.S. experience with no-fault insurance to date.
The study found that although no-fault insurance was intended to lower the costs of compensating people involved in car accidents by taking most of these cases out of the court system, no-fault insurance has actually increased auto insurance costs. More specifically, over 20 years, liability premiums have been consistently higher in no-fault states, and the gap has widened over time. By 2004, premiums under no-fault were 50 percent higher than those under tort.
The study also found that the cost increases have been driven primarily by high medical costs. The costs of medical treatment covered by auto insurance in no-fault states have become vastly more expensive than in the other states. Auto insurance claimants in no-fault states are more likely to seek reimbursement for every type of medical provider, from emergency room to chiropractor, and to seek reimbursement for more visits than similar claimants in states without no-fault. There is also evidence of greater medical cost inflation in no-fault states.
Despite waning support for no-fault insurance, there are few signs it will be repealed in most states where it still exists. In some states, there is consumer support for a modified form of no-fault–"choice"–that lets consumers forgo their right to sue other drivers in exchange for lower premiums.
The study concluded that further research is needed to determine exactly why medical costs grew so dramatically under no-fault auto insurance and to evaluate reforms introduced in no-fault states to control the growth of medical costs.
The Financial Literacy Center Is Up and Running
Over the past few decades, individuals have begun to take on more and more responsibility for a growing number of financial decisions in their lives, from buying a house to managing their resources in preparing for retirement. In the latter case, for example, the risks associated with providing for financial security in retirement have increasingly shifted from employers to employees; this has occurred as employer-provided pensions have shifted from defined-benefit to defined-contribution plans, in which employees are faced with myriad choices about where to put their money. Decisions that individuals make about buying a house or funding their retirement have far-reaching consequences.
Unfortunately, as much recent work in behavioral finance suggests, many individuals lack the financial literacy skills needed to make optimal financial decisions. To help in this area, The Financial Literacy Center—a joint center of the RAND Corporation, Dartmouth College, and the Wharton School of the University of Pennsylvania—supported by the Social Security Administration through a five-year cooperative agreement, was established in October 2009.
The center's mission is to develop and test innovative programs to improve financial literacy and promote informed financial decisionmaking, tailoring educational materials for Americans at various stages of their working lives—young workers, midcareer workers, and those approaching retirement—as well as current retirees who must manage the resources they have accumulated. Researchers will also develop financial literacy products for underserved populations, such as low-income, young, and disabled workers, all of whom are particularly vulnerable during periods of financial turbulence.
Upcoming: RAND Behavioral Finance and Public Policy Conference
On May 25, 2010, RAND will host the second annual Behavioral Finance and Public Policy Conference in Washington D.C. The conference is part of the RAND Behavioral Finance Forum (BeFi), which is a collective of academic, financial, and government leaders who are fostering cutting-edge behavioral research for practical application.
As we did last year, we have invited top academics to pitch new ideas in the area of consumer finances at this year's conference, whose purpose is to discuss trends and new policy options in consumer finance with academics, industry experts, members of Congress, their staffs, and other policymakers.
James Anderson is a behavioral/social scientist at RAND. His current research focuses on tort and criminal law. He is working on projects on the interaction between medical and auto insurance, innovation and entrepreneurship in the provision of legal services, the effect of defense counsel on the outcome of criminal trials, and the effect of land-use regulation on crime. Anderson has published on the indeterminacy of the economic analysis of tort law and on the effect of the federal sentencing guidelines on inter-judge sentencing disparity. Before joining RAND, he practiced federal habeas litigation as an assistant federal public defender for ten years. Anderson received a J.D. and a B.A. in economics from Yale University.
Read more about James Anderson »
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