Controlling Automobile Insurance Costs

Abstract

A utomobile insurance prices rose rapidly throughout the 1980s, even as the general rate of inflation slowed and automobile accident rates declined. The auto insurance component of the consumer price index more than doubled over the decade, increasing at a rate almost twice as fast as the overall CPI, and faster than even medical care inflation. The discrepancy was even greater from [1984][1985][1986][1987][1988][1989], when the auto insurance CPI grew at 9 percent per year and the all-items CPI at only 3.5 percent; by contrast, the medical component of the CPI grew only 6.5 percent annually over this time period. Some states have been hit harder than others, and double-digit inflation rates are not uncommon. In 1989 the average premium per car ranged from $353 in Iowa to $1074 in New Jersey (National Association of Insurance Commissioners, 1990). Premiums for high risk groups such as young males can be several hundred percent higher than the average. These trends have made auto insurance harder to afford for many consumers, particularly in urban areas, and the number of uninsured motorists has grown. As a result, auto insurance has become a potent political issue. It has figured prominently in gubernatorial races from New Jersey to California, and has stimulated many legislative and consumer initiatives aimed at reducing premiums.The populist view is that high insurance costs are primarily attributable to inefficient and excessively profitable insurance companies. Insurers are accused of paying claims without adequate controls, padding their expenses, and passing the costs along to the consumer, all while being shielded by a federal antitrust exemption. Insurers counter that insurance markets are competitive

Economic Analysis of Insurance Fraud

“…See Derrig et al (1994) on empirical evidence about the e¤ect of the presence of an attorney on the probability of reaching the monetary threshold that restricts the eligibility to …le a tort claim in the Massachusetts no-fault automobile insurance system. In the Tort system, Cummins and Tennyson (1992) describe the costs to motorists experiencing minor accidents of colluding with lawyers and physicians as the price of a lottery ticket. The lottery winnings are the motorist's share of a general damage award.…”

Car ownership, employment, and earnings

“…Cummins and Tennyson (1992) note that the principal component of insurance premiums consists of the expected payout the insurer will make during the duration of the policy. This "pure premium," in turn, is determined by two factors: the expected frequency of claims, and the expected severity or cost of the claim.…”

“…No-fault insurance states require first-party coverage for personal injury and impose thresholds for the severity of personal injuries below which one is ineligible to pursue lawsuits against a third party (Cummins and Tennyson 1992). Given that personal injury payouts constitute nearly 1/3 of the pure premium, the reduction in expected payout via reduced administrative costs and fewer suits is likely to yield a difference in insurance premiums between states with no-fault regimes and states with tort regimes.…”

Regulatory competition and forbearance: Evidence from the life insurance industry

“…We henceforth reference the former as direct distribution and the latter as broker distribution. Cummins and Weiss (1992) note that most of the relevant research indicates that direct distribution costs less and produces a higher return on equity than broker distribution. Gardner and Grace (1993) suggest that direct distribution generates lower agency costs than broker distribution, but their empirical tests are inconclusive.…”