Consumer Choice in the Auto Insurance Market

This article summarizes an analysis of how a plan that offers a choice between tort and absolute no-fault personal injury insurance would affect the costs of auto insurance in states that now have the traditional tort system. The authors estimate that the cost of compensating people on behalf of drivers who elect no-fault will be about 60 to 65 percent less than what they would have been if those drivers had been insured under the traditional tort system. These savings include both the compensation paid to accident victims from all forms of auto insurance and all transaction costs incurred in making such payments. Assuming that the savings are passed in full to consumers, these insurer savings translate into lower premiums for motorists. Those who had only the mandatory coverage under tort save the most — about half of their former premium under tort. Those who had fuller coverage — e.g., including collision/comprehensive — save about 30 percent. Premiums are unchanged for motorists who choose to remain in the traditional tort system. Nationwide, motorists would save anywhere from $5-15 billion, depending on the percentage of individuals who switch from tort to no-fault.