How Would a "Choice" Auto Insurance Plan Affect Insurance Costs and Compensation of Accident Victims?

In 1999, bipartisan legislation that would establish a choice auto insurance plan in all states was introduced in both the U.S. Senate (S. 837) and the U.S. House of Representatives (H.R. 1475). Under both bills, states would have the right to reject the choice plan and retain their current auto insurance plan. In earlier studies, RAND's Institute for Civil Justice (ICJ) estimated the effects of a choice automobile insurance plan that embodies the basic principles of the plan being considered by Congress. (The plan the ICJ researchers analyzed would be limited to the private passenger auto insurance market; the federal plan would extend choice to commercial auto insurance.) The Joint Economic Committee has used the ICJ results to predict the future effects of the federal plan.

The earlier studies were based on data, collected by the Insurance Research Council, on the compensation provided to representative samples of auto accident victims whose claims were closed in 1987 and in 1992. The ICJ has obtained comparable Insurance Research Council data for a representative sample of claims closed in 1997 and has updated the earlier analyses. The results, detailed below, are consistent with those of the earlier studies: Under a choice plan, those who elect the no-fault option will realize substantial cost savings while those who choose the modified version of their state's current system will not be affected.

What Is "Choice"?

How Does Choice Affect Costs and Premiums?

If cost savings were passed on to consumers, the 54 percent average savings for the injury-related portion of the insurance premium would translate into a 22 percent savings on the entire premium (nothing is saved on the larger property-related portion of the premium).

The choice approach not only allows drivers to stay with the state's current system if they choose but essentially holds them harmless if they do. In most tort-system states, no extra costs accrue to those staying with the modified version of the current system; in fact, there is an average injury-related savings of 7 percent (see "Stayers" in the table). Again, there is a range, from 0 percent (Idaho) to 18 percent (Rhode Island).

The ICJ research team also estimated savings for the no-fault states. The results were very similar (see the second data column in the table), with the exception that those who stayed with their state's current system would have saved even more than those in tort states--14 percent on average for the injury-related portion of the premium (or 6 percent on total premiums).

Finally, because the Joint Economic Committee was also interested in a scenario in which all current-system insureds switched to ANF, the researchers addressed that scenario. The results were very similar--a 51 percent average savings in injury-related insurance costs, equivalent to 21 percent savings on total premiums.

All these results assume that, before choice,

• 15 percent of each state's drivers were uninsured

• 30 percent of accident victims were injured in accidents in which no other driver was even partially at fault

• in 50 percent of the accidents in which another driver was at least partially at fault, the injured person makes claims on both his or her own first-party auto insurance and the other driver's third-party auto insurance.

The ICJ researchers reran their calculations for cases in which these assumed state numbers varied. The projected savings varied with changes in the underlying assumptions, but this analysis did not alter the main conclusions from the table below: The choice plan can lead to substantial savings for drivers who switch to ANF while generally not making other drivers worse off.

How Does Choice Affect Compensation?

The dark bars illustrate how $1,000 in compensation costs would be distributed in California under the current system. The dollar figure attached to each bar shows the amount that would be spent on that cost category. The light bars illustrate what these compensation costs would be under the choice plan. The dollar figure attached to each of the light bars shows the amount that would be spent in each cost category under the choice system. Under the choice plan, compensation for noneconomic losses is cut by about half. A small increment in compensation for economic loss is balanced by a small savings in transaction costs (mostly litigation costs) and in compensation to uninsured drivers who remain so.

Conclusion

• Allow drivers who are willing to waive their tort rights to buy personal injury coverage for 54 percent less than what they have to pay for personal injury coverage under their state's current system. (This change translates into a 22 percent savings on total auto insurance premiums.)

• Allow drivers who prefer to remain in a system similar to the current one to do so at essentially the same costs as at present.

These findings are robust to variations in the assumptions on which they rest. They are also generally consistent with the findings based on analyses of 1987 and 1992 data.

Through its reports, journal articles, conference presentations, and congressional testimony, the ICJ has played a major role in informing the evolving auto insurance debate and will continue to do so through additional evaluations. It is important to recognize, however, that the ICJ is not advocating the institution of choice insurance plans. Whether the savings are worth the loss of compensation for noneconomic damages is a question that can be answered only by consumers and their elected representatives. Questions of justice and equity are also not amenable to quantitative analysis and will play an important role in decisions made at the federal and state levels regarding the future of auto insurance in America.

Previous Choice Auto Insurance Studies

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