Bring Automobile Insurance Down by Bringing Auto Choice to Ohio
Recent reports show that Ohio’s auto insurance rates are below average for the nation. [1] While this is certainly good for Ohioans, this news nonetheless masks a larger trend — rising premiums nationwide. The burden of this insurance, especially in a state such as Ohio with mandatory minimum legislation, falls disproportionately on the poor. Policymakers need to begin exploring ways to improve upon a system plagued by high legal costs and court-based resolutions. Auto Choice — a reform meant to improve options as well as incentives for drivers — may be the answer.
Auto Choice provides an alternative to the current tort system. Current insurance policies are based upon both economic as well as pain and suffering losses. The awarding of pain and suffering damages for such small injuries as “whiplash” have led to a huge increase in fraud and abuse. In Washington, D.C., for example, auto tort lawsuits increased by 137 percent between 1985 and 1995 even as automobile accidents declined by 22 percent. [2]
The key element of Auto Choice is to offer pain and suffering coverage as an optional item. This eliminates the need for expensive legal battles and refocuses the coverage of losses on more reasonably determined economic losses. The result is that economic losses are more adequately covered and, with the removal of incentives for abuse, premiums will likely drop. Because of the ability to avoid court remedies, Auto Choice also allows individuals opting for only economic loss coverage to receive compensation automatically and regardless of fault. [3]
Savings from Auto Choice are significant. Based on calculations from The Rand Institute for Civil Justice, the Joint Economic Committee of the United States Congress (JEC) estimated that if a 100 percent switch occurred nationally, premiums would fall by $47 billion in the U.S., averaging a savings of $189 per automobile. [4] In Ohio, this would likely mean consumer savings of over $1 billion. [5]
The incredible potential of Auto Choice arises from the significant drawbacks within the current system. Auto insurance now rests on “torts,” which occur when individuals sue one another to obtain relief for damages. [6] The full cost of inflicting any damages — physical, emotional, or otherwise — should fall on the perpetrator.
In reality, however, this is a rare occurrence. The incentives built into the tort system work against its best intentions. According to a recent study by the JEC, “[l]ess than one-fifth of the bodily injury premium goes to pay for legitimate medical bills and lost wages.” [7] Pain and suffering damages come to 19.3 percent, while attorney’s fees make up over 25 percent. The remaining premium consists of fraudulent and excessive claims, taxes, fees, sales commissions and overhead expenses. [8]
Much of this cost is the result of fraud and abuse. The subjective nature of “pain and suffering” has led courts to apply a standard of two to three times economic losses to determine awards. Not surprisingly, this provides strong motivation for individuals to aggressively seek out economic losses and bring them to court in order to obtain the much larger non-economic loss payment. Rand estimates, for instance, that up to forty-two percent of claimed medical costs are a direct result of the tort system’s distorted incentive structure. [9]
As mentioned previously, auto insurance premiums have been rising and the economic burden of rising premiums falls disproportionately on inner city residents and the poor. Families below 50 percent of the poverty line spend over 30 percent of their income on auto insurance. Urban area coverage is 32 percent more expensive than coverage for other areas, with coverage in suburbs often significantly less costly than in the cities. [10] The effect of this disparity is to stifle economic mobility. According to UCLA professor Paul Ong, “on average, welfare recipients who owned an automobile were 12 percent more likely to work at all, worked an additional 23 hours per month, and brought home an additional $152 per month.” [11]
In light of excessive costs that the tort system inflicts, policymakers should actively investigate the merits of proposals such as Auto Choice. Ohio drivers should not be forced to pay unnecessarily high premiums simply to maintain the status quo.
Footnotes:
[1] “Ohio drivers pay lower-than-average insurance,” Cincinnati Business Courier, 22 August 2003. Available at: http://cincinnati.bizjournals.com/.
[2] Michael Horowitz, “Suited for reform” (Washington, DC: The Hudson Institute, 17 February 1999). Available at: http://www.hudson.org/.
[3] Choice in Auto Insurance: Updated Savings Estimates for Auto Choice (Washington, DC: Joint Economic Committee, 24 July 2003). Available at: http://www.house.gov/jec.
[4] Choice in Auto Insurance.
[5] Auto Choice: Relief for Businesses & Consumers (Washington, DC: Joint Economic Committee, July 1998).
[6] “Tort law: An Overview,” The Legal Information Institute (Ithaca, New York: Cornell Law School). Available at: http://www.law.cornell.edu/.
[7] Choice in Auto Insurance.
[8] Ibid.
[9] Ibid.
[10] Ibid.
[11] Auto Choice: Impact on Cities and the Poor (Washington, DC: Joint Economic Committee, March 1998).
