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NATIONWIDE DEBATE ON PRICING AND SELLING OF AUTO INSURANCE

A family of four in Los Angeles pays $5,800 a year for auto insurance. A new Jersey family with two college students living at home pays $3,600. In Philadelphia, a three-car family of four gets a bill for $10,000.

- Since 1983, the Consumer Price Index rose 18.6 percent, while auto insurance rates went up 56 percent.- It is estimated that in some parts of Los Angeles, up to 86 percent of car owners are uninsured because they simply can't afford the costs.

It is not surprising that we are hearing a nationwide call for reform in how automobile insurance is priced and sold.

The catalyst for this national debate was the passage by California voters last November of Proposition 103, which requires insurance companies to slash property/casualty insurance rates at least 20 percent, to offer "good driver" discounts of an additional 20 percent, to determine automobile premiums primarily by driving record and not home address, and to obtain regulatory approval before raising rates.

Forty insurance companies stopped writing car-insurance policies in California immediately before and after the vote, and others threatened to pull out of the market, but the situation stabilized somewhat when the California Supreme Court agreed to rule on the proposition's constitutionality. The court recently upheld almost all of the proposition but gave the insurance commissioner authorization to exempt individual companies that can show the rollback will deny them "a fair rate of return." A week after the decision, 65 companies had applied for exemption.

But in a case of "as California goes, so goes the nation," other states and other consumer groups have been looking at the possibilities of similar measures.

It will likely be some time before all the fallout settles or before there is any nationwide reform of the system. In the meantime, it is helpful to know what some of the key players are saying and what some of the major proposals encompass.

- AT MEETINGS of the American Council of Consumer Interests this spring, Netty Hoge, director of the Consumers Union West Coast Office, a leading lobbyist for Proposition 103, noted, "Proposition 103 is a cause celebre in the consumer area, but it is not such a radical matter. Actually, it brought California into the mainstream. California and Idaho are the only states that had "open competition," where companies were not required to file anything with anyone before raising their rates."

But since the passage of the proposition, she says, there has been an "upwelling of interest in insurance reform" throughout the country.

- DAVID SNYDER, chief counsel for the American Insurance Association, also speaking at ACCI meetings, agrees that things need to change in the insurance arena. "The dialogue going on now is one of the most positive moves in years. It's good for insurers and consumers. There is a long-overdue obligation on the part on insurers to listen." But, he says, forced rollbacks are not the answer.

"Passage of Proposition 103 around the country will jeopardize the financial stability of the insurance industry. What we need to do is cooperate together to reduce costs and to pass those reductions on to the consumer."

Insurance rates are high because losses are high, he says. "Between 1982 and 1987 there has been a 75 percent increase in losses auto insurers pay out."

- WILLIAM B. SNYDER, chairman of the GEICO Corp., says in a publication from the Direct Selling Education Foundation, "We certainly agree with the public that automobile insurance costs are high. Unfortunately, in the context of today's `get-all-you-can' legal environment, auto insurance premiums must keep up with the spiraling costs of medical care, auto repair, auto theft and insurance fraud and must protect policyholders from financial ruin in the face of escalating personal injury liability lawsuits."

These problems could be resolved, says Snyder, by the establishment of true no-fault auto insurance laws.

Under a no-fault system, each insured driver is guaranteed compensation by his or hew own insurance company for injuries and lost wages resulting from an auto accident, regardless of who caused the accident. In exchange for this guaranteed compensation, injured drivers give up the right to sue for damages unless their injuries exceed a threshold specified in the no-fault law.

"No-fault insurance has proved beneficial to consumers in states with true no-fault laws, such as Florida, Michigan and New York," says Snyder. "Unfortunately, manipulation and watering down of statutes have caused misunderstanding by the public and have thwarted no-fault efforts in other states."

- PROJECT NEWSTART, a consumer coalition that has grown out of the recent controversy, has a similar proposal. Chaired by Virginia Knauer, former director of the U.S. Office of Consumer Affairs, the coalition is calling for more choice in the type and extent of auto insurance coverage. Consumers should be able to choose, it says, between a no-lawsuit or a "sue and be sued" system of settling traffic accident claims. Consumers should be able to design their own automobile insurance policy, one that covers only what the individual consumer wants - at a fair and affordable price, says Knauer.

- STEPHEN BROBECK, executive director of the Consumer Federation of America, notes that reform measures must be two types: loss prevention and improved insurer efficiency.

"There are four basic strategies for reducing payments for injuries without diminishing benefits to the insured: reducing the number of serious accidents, improving crash protection, reducing medical expenses and reducing litigation expenses."

The most effective strategies for preventing the more than 40,000 deaths and nearly two million injuries related to motor vehicle accidents, says Brobeck, are curbing drunk driving, improving truck safety and lowering speed limits. Injuries can be prevented by also improving the crashworthiness of motor vehicles, increasing safety belt usage and installing air bags.

Measures also need to be looked at that would reduce repair costs - such as reducing the costs of parts, reducing labor costs, strengthening bumpers - and that would cut theft and fraud.

Improved insurance efficiency is another matter. "There is considerable evidence of insurer inefficiency. Most convincing is the significant range of prices and expenses among different insurers."

And, he says, there are substantial barriers to comparison shopping. "Auto insurance products are unavoidably complex. Since prices vary among buyers, one consumer cannot rely on the experience of another," says Brobeck.

"There are two principal strategies for improving insurer efficiency, thereby allowing rate reductions - rate regulation and increased competition."

- ANOTHER VOICE that is calling for insurance rate reform is the National Organization for Women, which presents a case that current "unisex" adult driver price structures tend to discriminate against women.

"At every age in their driving lifetime, men as a class drive twice as many miles and have twice as many accidents as women," says Patrick Butler, a researcher for NOW. "This fact is not an argument for sex discrimination. Instead it shows on a large scale that accidents are proportional to mileage. It also shows that, for each car in a class, mileage both measures the car's exposure to risk of accident and measures the cost of providing insurance protection for its owners and users.

"Since women average half men's mileage but are deceptively charged unisex prices, they are paying on average twice as much as men per mile for identical coverage on their cars."

- EXPECT TO hear more of the insurance debate in months to come. While no one yet agrees on the solution, there is a consensus that the time has come for major reform.

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(ADDITIONAL INFORMATION)

Opinions

"According to a recent national opinion survey we commissioned, 72 percent of the public believe these rates are too high, while 41 percent feel they are much too high." - Stephen Brobeck, executive director, Consumer Federation of America.

"Unfortunately, in the context of today's 'get-all-you-can' legal environment, auto insurance premiums are not too high for the product provided." - William B. Snyder, chairman, GEICO Corporation.

"When young men in cities pay more for state-required insurance than their car is worth, who can claim that rates are too high?" - J. Robert Hunter, president, National Insurance Organization.

"We can't wave a magic wand, suddenly have lower prices, and expect everything to be OK. The factors driving up auto insurance premiums are complex economic and social issues." - Mechlin D. Moore, president, Insurance Information Institute.

"Since women average half men's mileage but are deceptively charged unisex prices, they are paying on average twice as much as men per mile for identical coverage on their cars." - Patrick Butler, research scientist, NOW.

"People knew something was wrong when their automobile insurance premiums began to exceed their property tax, and in some cases their rent or mortgage payments. It is not surprising that consumers began reacting to this situation by taking matters into their own hands - sometimes collectively by ballot initiatives, sometimes individually by dropping out of the system and driving uninsured." - Virginia Kanuer, chair of the New Start Consumer Insurance Project.