A fine incentive: a study shows that states with higher penalties for driving without insurance tend to have fewer uninsured motorists. (Auto Insurance: Property/Casualty).

Automobile insurance rates, rate regulation and the uninsured-motorist problem are recurring topics for legislators in the majority of states. Every year, insurers file for rate increases. Some are granted, as was the case this year in Texas, where an average 5.3% increase was approved. Other states, such as Massachusetts, have rejected rate increases for 2002. Still others have passed legislation in recent years that required rate cuts.

Requests for rate increases are generally based on increased claims costs. With the Texas rate request, an increase in uninsured-motorist claims was cited as one cause for the needed increase.

A study by professors at Florida State University's College of Business examined the structure of the penalties and enforcement measures employed by states with respect to compulsory-insurance and financial-responsibility laws. The study found that, for the period 1995 to 1997, the presence of a compulsory-insurance law as well as high fines for noncompliance appeared to decrease uninsured-motorist rates.

Compulsory Insurance

States began enacting compulsory-insurance laws as early as 1927, with more than 80% of states passing compulsory-insurance laws in the 1970s and 1980s. Alabama is the most recent state to pass a compulsory-insurance law. Its law became effective in 2000. Forty-five states and the District of Columbia have laws requiring the purchase of minimum limits of liability automobile insurance.

The primary purpose of these laws is to reduce the number of uninsured motorists, thereby reducing claims and, ultimately, insurance premiums. But even still, 13% to 19% of drivers are uninsured. States with the highest estimated uninsured-motorist rates, such as Colorado and South Carolina, have rates near 31% in 1997. Some states have seen a substantial increase in uninsured-motorist rates. The uninsured-motorist rate in Florida, for example, is estimated to have increased almost 8% from 1990 to 1995.

Two key questions remain unanswered:

* Have these laws been effective in reducing uninsured-motorist rates?

* What is the primary source of the variation in uninsured-motorist rates among states that have compulsory-insurance laws?

Several factors have been identified as affecting uninsured-motorist rates. These include the type of regulation (financial-responsibility laws and compulsory-insurance laws), demographic characteristics, cost of insurance, level of enforcement and penalty structures.

Fines and Jail Time

The primary types of penalties for noncompliance are fines and jail sentences. Fines are the most common penalty, with more than 86% of states having some type of fine structure. Fines in 1997 ranged from a low of $20 in Missouri to a high of $5,000 in Mississippi.

States also use fines as penalties for fraud (misrepresenting compliance) and failing to comply with requests to surrender license and/or registration (if a driver has failed to comply with a financial-responsibility law). In some states, fines for these offenses are greater than noncompliance fines. For example, the average fine for a first offense of noncompliance in Utah is $750, while the fine for fraud is $2,500. In Massachusetts, the average fine for noncompliance is $500, while the average fine for failing to comply with requests to surrender license and/or registration is $2,750.

Seventeen states use jail sentences as penalties for noncompliance. Arkansas, Colorado, Minnesota and Virginia have the longest jail penalties, with the average number of days in jail being 365. Some states also have jail penalties for fraud and failure to comply with requests to surrender license and/or registration, equal to or greater than the jail penalty for noncompliance. While more than one-third of all states have jail penalties, it is questionable whether these penalties are enforced.

Enforcement measures range from requiring proof of insurance at the time a vehicle is registered to providing proof of insurance at the request of a police officer. Forty-five percent of states with compulsory-insurance laws require proof of insurance at the time of registration. Only 25%, however, require proof of insurance to be provided at the request of a police officer. Few states conduct random checks in which drivers are required to provide proof of insurance.

The results of the study found that the presence of a compulsory-insurance law and the level of average fines were negatively related to the uninsured-motorist rate. These results imply that states with compulsory-insurance laws and stricter fine structures experience lower uninsured-motorist rates. The study also found that fail time was positively related to the uninsured-motorist rate. While surprising, this result is likely evidence of the fact that if motorists do not feel this penalty will be enforced, the penalty does not act as a deterrent to noncompliance.

The study also examined population and demographic factors. The results indicate that poverty and the cost of compliance increase the uninsured-motorist rate. The cost of compliance is a compilation of three variables: an aggregate measure of the cost of liability coverage, the percentage of population in urban areas and the percentage of young male drivers. These variables were combined into a single factor because they are highly correlated. As a result, the study was unable to determine the impact of the individual components on the uninsured-motorist rate.

Electronic Reporting

The results did not find that the current detection measures, such as proof of insurance at the time a vehicle is registered or at the request of a police officer, made a significant impact on reducing the uninsured-motorist rate. However, the advent of electronic-reporting systems may provide a more efficient way of detecting noncompliance. (See "Proof Positive," page 59.)

More than 20 states have turned to electronic insurance-reporting systems to increase detection. In these states, insurers are required to report information about policies in force as well as terminated policies. This information then could be matched against vehicle registration data to determine which registered automobiles are not insured. Dan Kummer of the National Association of Independent Insurers estimates that it will cost insurers hundreds of millions of dollars to electronically transmit insurance coverage data to states.

Since it is unlikely that states will be able to completely eliminate the uninsured-motorist problem, the question becomes, "What is an acceptable level of noncompliance?" To answer this question, states will have to examine the cost of detecting noncompliance with the savings associated with the corresponding reduction of noncompliance.

Cassandra R. Cole, Randy Dumm and Kathleen McCullough, who co-authored the study, are assistant professors at Florida State University's College of Business in Tallahassee, Fla.