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Auto Choice Savings Overstated, Actuaries Tell Congress

12 August 1998

Auto Choice Savings Overstated, Actuaries Tell Congress

    WASHINGTON, Aug. 12 -- Legislation to create first-party
personal protection coverage, currently under consideration as an alternative
to traditional automobile insurance, may not reduce costs as much as hoped by
its sponsors, the American Academy of Actuaries reported to Congress this
week.  The Academy issue brief analyzes H.R. 2021 and S. 625, bills introduced
by House Majority Leader Dick Armey (R-Tex.) and Sen. Mitch McConnell (R-Ky.).
    The legislation creates personal protection coverage (PPC) that reimburses
insured individuals for economic loss resulting from auto-accident injuries
without regard to fault. Individuals who opt for such coverage may file a
claim against an at-fault driver only for economic losses over and above those
reimbursed by the personal protection coverage.  Bill sponsors contend that
PPC will reduce costly litigation while quickly compensating injured
individuals for lost wages, medical expenses, and other costs.  Savings
estimates have ranged as high as $246 billion over five years.
    However, according to Michael J. Miller, leader of the Academy study, many
individuals will not switch to PPC, and therefore cost savings may be limited.
"Typically, the most popular type of coverage in each state is the default
option, which is issued to individuals who do not select a specific type of
coverage," Miller says.  "Because PPC is not the designated default option in
the legislation, many people can be expected to continue with their current
type of coverage."
    The legislation could also mean higher auto insurance costs for
individuals and families. "Currently, a driver who causes an accident is
responsible for the losses incurred by individuals in other vehicles," Miller
says.  "The proposed PPC system would shift those costs to the driver of the
not-at-fault vehicle.  Because heavy commercial vehicles typically do more
damage to passenger vehicles than vice versa, the net effect of PPC will be to
shift insurance costs from commercial enterprises to private individuals."
    The Academy report notes other bill provisions that may boost costs.  For
example, in the absence of clear language to prohibit so-called limit
stacking, the adding together of coverage limits for a single claim, the bill
opens the door to double awards for a single injury.  In addition, the Academy
calls for clear statement of the underlying assumptions of the bill's costing
model and publication of cost estimates based on sensitivity testing.
    The American Academy of Actuaries is the public policy organization for
the actuarial profession in the United States.