Senate Committee Examines Federal Auto Insurance Measure
8 September 1998
Senate Committee Examines Federal Auto Insurance Measure; Reforming Auto Insurance Systems Will Reduce Consumer Costs WASHINGTON, Sept. 8 -- A Senate committee will hear testimony
tomorrow on federal legislation to provide consumers with a choice of a
lower-cost, no-fault auto insurance policy. According to the American
Insurance Association, special interest pressure has hindered efforts at the
state level to provide a more efficient and effective choice of auto insurance
policy to consumers.
"Whole industries rely on being able to tap into the $120 billion auto
insurance premium pool," said David Snyder, AIA assistant general counsel.
"These interests have successfully fought to preserve the status quo and
protect their economic self-interest. The result of these realities is public
unrest combined with legislative gridlock."
The Senate Commerce Committee is exploring whether to advance
"auto-choice" legislation, which would give consumers the opportunity to
select a lower-cost, no-fault auto insurance policy.
Snyder added that to determine what policies are needed to improve auto
insurance systems, elected officials should follow the money. "The principal
factor in states with high-cost auto insurance is that a large portion of
benefits that should be paid to injured victims are being lost to lawyers'
fees and other tort system related costs," Snyder said.
He added that the overwhelming majority of premium dollars go to claims
payments. According to industry data, these payments account for 78 cents of
every premium dollar. While auto insurance companies have reported healthy
profits recently, the average rate of return over the past decade has hardly
been spectacular compared to other industries. Auto insurers had a 10.2
percent rate-of-return from 1987-1996 compared to over 12 percent for other
industries.
"Most state auto insurance systems are characterized by two fundamental
elements -- tort liability compensation rules imposed on consumers without
choice and heavy government regulation of insurers, including price controls,"
Snyder said. "Under tort liability auto insurance systems in many states,
fraud and uninsured motorists are widespread; seriously injured people are
under-compensated; minor or non-existent injuries are grossly overcompensated;
and consumers have few meaningful choices."
Snyder said some states have responded to tort liability problems. "New
York and Michigan both have 'no-fault' systems that balance generous automatic
payments with modest restraints on litigation, including recovering
non-economic damages in serious injury cases."
Beyond the guaranteed benefits that compensate more than 90 percent of
losses quickly, the no-fault laws in New York and Michigan have reduced
insurance costs by 20 percent from what they would have been under tort
liability systems.
Snyder also said that while several industries have benefited from some
type of deregulation, auto insurance still remains probably the most heavily
regulated private product in America. "Many states still have the legal
authority for, and waste significant resources on, price controls of private
passenger auto insurance. This creates obstacles to innovation and the ability
to adjust to market conditions, and leads to less competition and higher
prices in auto insurance."
The federal auto choice bills now being considered by Congress (S. 625 and
H.R. 2021) have been attacked as not offering a true choice and infringing on
states' rights. However, Snyder said, "The bills increase consumer choice and
potentially reduce costs in auto insurance."
Over the past two years, auto insurance rates have been reduced in many
states as improved car safety and fewer claims have cut costs. "A well-crafted
auto choice measure can provide significant savings," Snyder said. "And as we
have seen recently, when underlying costs are reduced, consumers reap the
benefits of lower insurance rates from the competitive market."
Opponents of no-fault also have made accusations that federal auto choice
proposals encourage people to drive dangerously, but Snyder sees no validity
in this point. "This is based on the ridiculous assumption that people
consciously determine what kind of insurance they have before they do stupid
things on the highway. Not only does this defy common sense but it is simply
untrue." No-fault Michigan, for example, has an auto accident fatality rate of
19.67 per 100,000 registered vehicles, while tort based Louisiana has 25.14,
tort based Arizona has 38.69 and tort based Mississippi has 40.77. Further,
nothing in the federal bills reduce legal or insurance premium penalties
against those who cause accidents or violate traffic laws.
"In fact, the tort liability system with its built-in profit in minor
injury cases called 'pain and suffering' has clearly been an incentive for
causing accidents," Snyder added. "The profits in faking or causing accidents
and injuries to recover subjective 'pain and suffering' is eliminated under
good no-fault laws because all you get are your actual economic losses, unless
the injury is very serious or caused by a drunk or drugged driver.
"Cost and competition could be improved in many states if auto insurance
laws were reformed and if competition in auto insurance were encouraged
through moderate deregulation, especially the elimination of price controls,"
Snyder said. "These two reforms alone would assure better benefits for injured
accident victims, reduce costs, and provide more choice for customers."
The American Insurance Association is a trade association representing
more than 300 major insurance companies which provide all lines of property
and casualty insurance. AIA's headquarters is located in Washington, D.C. and
the association has representatives in every state. All AIA press releases are
available at http://www.aiadc.org.
CONTACT: Dan Zielinski of the American Insurance Association,
202-828-7494 or dzielinski@aiadc.org.
