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A proposal for change: affordable automobile insurance.

A Proposal for Change: Affordable Automobile Insurance


The insurance industry is failing to satisfy its urban auto insurance customers' affordability needs. Ths has contributed to a serious industry image problem. The public is demanding that the industry find a solution. A National Coalition for Auto Safety is proposed involving insurers, consumer groups, and safety interest organizations.

Operating at both the national and state levels, the Coalition would mount a comprehensive attack on auto accident costs encompassing auto damageability factors, occupant protection measures, driver behavior modification, traffic law enforcement, and various other elements of our urban traffic systems.

The primary purpose of any business must be to identify and satisfy the needs of its customers. That is its reason for being, and if it can not perform satisfactorily, then it will not survive long in the marketplacE.

In recent months, in too many places and for too many people, our industry has been failing to satisfy its customers, not because it does not have hard-working people, good systems, or sufficient capital, but because it has not been sensitive enough to the need for affordable insurance. The result has been a weakening of our image and credibility with the public. This conclusion is well documented in the results of a recent survey by the Opinion Research Corporation. It showed that the public put the property-liability insurance business third from the bottom when asked to rank the image of 24 major industries. Only the tobacco and nuclear power industries got lower ratings.

Suits filed against several major insurers and ISO by the attorneys-general of some 19 states alleging a massive insurance industry conspiracy certainly have not helped, though many people have no clear notion of what the charges actually involve. On another front, the passage and subsequent judicial approval of most provisions of Proposition 103 in California have not only created a major threat for us in our largest and fastest growing market, but are stimulating consumer activists and opportunistic politicians to attempt similar actions in at least 20 other states. These happenings are further reinforcing our reputation as an industry that has poor relations with the public.

In recent years, our image has also been tarnished by unacceptable volatility in the commercial lines market, a situation aggravated by wide interest rate fluctuations and high liability losses caused, in part, by a changing tort liability system. The result has been a flight by some of our commercial lines customers from traditional insurance to other methods of handling risk. Some observers feel we will never get many of these customers back.

The major problem for insurers at the present time is unquestionably the spreading public discontent with auto insurance rates. One can begin to understand why by looking at the national averages. Over the past five years, the average cost of auto insurance has risen almost 60 percent, more than three times that of the Consumer Price Index. In urban areas, this cost escalation has been even more pronounced. The end result has been quite predictable: public anger and a growing perception that insurers are somehow "ripping them off."

Within the insurance industry, we know only too well that escalating auto insurance costs are not the result of insurer greed, but rather of the cost of those things that insurance pays for. The cost of various medical care items are up significantly more than auto insurance rates. Competition in the crash parts business has slowed down auto repair cost increases somewhat, but even so, the latest study by the Alliance of American Insurers shows that replacement parts to rebuild a $13,000 car would cost more than $40,000--and that does not include labor.

The problem is even greater in congested urban areas where auto accident claims and suits have increased significantly and where the inflationary trends in auto repair costs and medical care expenses have climbed even faster than elsewhere. Other factors are also at work in some urban areas. In California, for example, drivers buy expensive-to-repair specialty cars in far higher numbers than in the rest of the nation. Californians also own a higher proportion of small cars that produce more severe injuries when involved in an accident. And they sue one another more than people in most other states. In 1986, suits stemming from auto accidents were up 29 percent statewide, but 47 percent in Los Angeles County alone. California shares with New Jersey the distinction of having the highest percentage of cars garaged in urban areas -- about 85 percent. And it is an established fact that both the frequency of accidents and their costs rise in more densely populated areas.

The troubled New Jersey auto insurance system has some features in common with another badly troubled state, Massachusetts. Not only does Massachusetts have a weak no-fault system, it also has the most highly regulated auto insurance market in the nation, and some of the highest rates as well. The two are very much related. In Massachusetts, nearly 60 percent of drivers are in the state assigned risk facility because for several years state officials have arbitrarily held auto rates below the level needed to pay for the system.

New Jersey and Massachusetts are extreme examples of how some regulatores facing political pressure over higher insurance costs have dealt with the problem. For them, the quickest fix has been to redistribute costs, making less risky drivers or those who live in the suburbs or rural areas pay more than their share, and also by drawin on insurers' capital. They mistakenly see this as a less painful solution than facing up to levying taxes to subsidize the true auto insurance costs of the poor, the young and the reckless.

Some industry insiders cling to the notion that the problem is one of public image. They maintain that if we could make the public undertstnad that we are decent and honest, and that we are vulnerable to a powerful plaintiff's bar, unresponsive politicians, and many other special interest groups, then our image and our credibility would improve and we would not need to worry about possibly losing our franchises.

Don't believe it for a moment! The public no longer cares who's at fault. all they know is that the cost of auto insurance in many urban areas is too high, and they want something done about it. If the property-liability insurance industry's only message boils down to a justificaton for higher costs, an increasing proportion of the public is prepared to revoke our franchise and look for someone else who can solve their problems. If we want to maintain a role in the auto insurance system without civil servants ourselves, I believe we are going to have to become much more pro-active, more aggressive, more imaginative and, above all, more successful in designing solutions for auto insurance availability and affordability problems, particularly in urban areas.

We will regain our credibility and public support only when and if the consumer finally becomes convinced that we are part of the solution and not part of the problem. This means directly addressing social concerns: communicating ideas more effectively to the public and, most importantly, getting personally involved with the political process at all levels.

Insurers need to mount a coordinated and comprehensive assault on the costs of auto insurance. We have addressed many facets of the problem in the past. But now we must intensify those efforts, while at the same time tackling other aspects of the problem relatively new to us.

A start was made in this direction at the recent National Conference on Automobile Insurance Issues held in Alexandria, Virginia. The meeting attracted some 500 participants including a good cross-section of consumer activists, safety group representatives, regulators, politicians, and insurers. Using a panel discussion format and informal networking sessions, a good amount of give-and-take took place on a wide variety of issues. General agreement was reached that an effective no-fault auto insurance approach was needed in most urban states, most likely one offering consumers a choice between a traditional tort liability policy or a less expensive no-fault policy that would not allow them to sue or be sued. In addition, a consensus was obtained on the desirability of emphasizing a wide variety of accident prevention related programs which can have a salutary effect on automobile accident frequency and severity in urban areas.

The recently published ISO/NAII study titled "Factors Affecting Urban Auto Insurance Costs" clearly spelled out the fact that the urban auto insurance affordability problem in the bodily injury and comprehensive collision coverage areas is definitely one of claim frequency. In an analysis of some 18 urban centers, the study showed that major cities such as Philadelphia, Newark, Baltimore, Los Angeles and Miami have claim frequencies ranging from 4.5 to 2 times the average existing in the remainder of their respective states. Thus, the strategy of attacking auto insurance costs in urban areas through vigorous loss prevention programs is a clear and sensible one.

What should such a program entail? First of all, it means adopting additionaly needed federal regulations on safety and damageability for auto manufacturers desiring continued access to the U.S. market. For example, the simple reinstatement of the five-mile-per-hour bumper standard could save U.S. drivers millions of dollars a year in avoidable repair costs. We have had a recent breakthrough on the provison of air bags by major U.S. auto manufacturers, a great victory for American drivers. We need to keep on the current timetable, or perhaps even speed it up. And we must find other ways to improve the general crash worthiness of autos. We need to keep reminding auto makers that a significant number of every model they build will have to be repaired at some point, and therefore should be designed accordingly.

Any coordinated assault on auto insurance costs must be spearheaded by aggressive traffic law enforcement. More good people must be attracted to police work, and some of the best of them need to be convinced that traffic law enforcement is an attractive high priority police function warranting their active commitment and involvement. Our industry, my own company included, has in the past supported such key organizations as the Northwestern Traffic Safety Institute and we need to reaffirm and broaden such support. Oir police must be given the backing they need, financial and otherwise, to aggressively enforce our traffic laws, break up fraudulent claim and theft rings and crack down even more on drunk driving.

Cutting auto insurance costs also means following up effective police work with tough and consistent administration of justice in the courts. Behavior that increases auto insurance costs for everyone must be deterred through appropriate fines and jail sentences and removal of driving privileges from those who abuse it. In many jurisdictions, this will represent a significant departure from current practices and we will need to help the judiciary to stand tall in this regard.

Perhaps the best way to help the police and the courts is by cutting down on the number of problem drivers who get on the road in the first place. That means tightening up on both initial and renewal driver testing. Related to that is the need to maintain accurate records of violations and accident involvement; information that is accessible by police, licensing authorities in other states and insurers. Most important, the entire system has to be tied together, so that bad behavior on the streets and highways leads with some certainty to the consequences called for by law.

Certainly, improved roads engineered for safety, well-maintained and provided with adequate traffics signs and controls are vital elements in cutting the cost of insuring urban travel. Particularly in congested urban areas, where so much of our problem is centered, cutting down on the volume of traffic through greatest use of public transportation, car-pooling and other measures can also offer definite payoffs.

What I have outlined is a tall order, nothing less than addressing all of the complex loss prevention related factors that affect the cost of auto insurance. Do we have an existing industry organization that can direct this kind of comprehensive program?

The Insurance Institute for Highway Safety (IIHS) at one time or another has addressed several of the outlined program elements. I think IIHS is one of the best investments our industry has ever made. It could certainly serve as the focal point for directing insurance industry efforts in the type of program I envision. However, one may argue that today we need to broaden our base of support beyond the insurance industry. We need a broadly based auto safety umbrella group that would include all the interest groups that have a stake in controlling auto insurance costs.

The important group of participants should be consumers and the organizations that represent them. There is something seriously wrong with our industry's current relationship with consumer groups. At one time we stood shoulder to shoulder with many leading consumer groups on issues that affected public health and safety. Today, we find consumer leaders all too often lined up against us on issues where our differences should be reconcilable. We need to forge alliances with consumer groups on these and any other issues where our interests and theirs can be brought together.

Containing auto accident costs is an issue of great interest to many other groups, including The American Association of Motor Vehicle Administrators, the traffic court section of the American Bar Association, the Center for Auto Safety, the National Association of Chiefs of Police, the Commission on Uniform Traffic Laws and Ordinances, the list goes on. The point is that there are many who share our interest directly or indirectly in creating an auto insurance reparations system that is both affordable and effective.

In short, I am suggesting that we form a new national coalition in which the auto insurance industry would play a strong role in terms of time, effort and financial support, but which would provide ample opportunity for other groups to participate as equal partners and help shape its programs and policies. I see the need for this new organization to play a leading role in various kinds of accident reduction and cost containment efforts at both the national and local levels. In both situations, the coalition would seek to bring together and focus the combined perspectives and resources of consumer groups, insurers and auto safety interest groups on the issues at hand.

I am pleased to be able to report that recently a number of major auto insurers and trade groups have agreed in principle with some of the leading consumer and safety interest organizations to organize and support the operation of a National Coalition for Auto Safety. The Coalition will have as its principal focus the passage of effective highway safety legislation, the implementation of regulations aimed at reducing auto accident and theft costs and also the initiation of action-oriented programs to contain the costs or urban area accidents. The Motor Vehicle Agenda of the Coalition for Consumer Health and Safety and the IIHS's Practical Agenda for Highway Safety will serve as the initial reference points for the Coalition's activities.

The Coalition intends to help build broad-based alliances of citizen groups, insurers, and safety interest groups to promote highway safety at the national, state and local levels as well as to fund private and public groups which demonstrate an ability to develop and advance legislative, regulatory, or action programs relating to effective highway safety and loss reduction.

Aside from advocating at the federal level issues such as passive restraints, vehicle side impact protection, bumper standards, and improved truck and van safety, the Coalition envisions participating in a wide variety of possible activities/projects at the state and local levels. These could include such programs as:

(1) In selected states, working to secure passage of effective mandatory seat belt usage laws and/or strengthening laws to include primary enforcement and new rear seat coverage provisions.

(2) In selected states, strengthening drunk/drugged driving related laws and encouraging states to adopt a policy of strict enforcement. Encouraging the National Highway Traffic Safety Administration to increase its public education efforts on the dangers of drunk/drugged driving. Also, working with other interested groups to develop hard hitting public education campaigns.

(3) In selected major cities experiencing relatively high auto accident claim frequencies, stimulating the undertaking of comprehensive studies to determine exactly why their claims experience is noticeably worse than average. Such studies could include evaluations of police traffic enforcement services, effectiveness of traffic court administration and procedures, completeness and quality of traffic system controls and signs, street and highway design/maintenance programs, traffic accident patterns, and traffic flow/density patterns. Providing grants to partially fund such studies and, working through local representatives of Coalition member organizations, pressing for public financing of the remaining costs.

(4) Based on the outputs and recommendations of such studies as outlined above, developing and implementing appropriate strategies to build the public political support necessary to carry out recommended countermeasures. These are likely to include new or revised state laws or municipal ordinances and regulations, increased budgetary support for selected traffic safety related agencies, new publicity and enforcement programs, and so forth.

(5) In one or two major cities experiencing relatively high auto fraud and/or theft losses, undertaking analyses of what public agencies and insurers can do to reduce the magnitude of these problems. Again, local representatives of Coalition member organizations would be called upon to help build public/political support for any needed countermeasures.

(6) In a few selected major cities experiencing a relatively average auto claim frequency pattern as compared to their state as a whole (i.e., San Diego, San Jose, Seattle, Jacksonville), undertaking comprehensive studies to determine exactly why this favorable result is being obtained. Depending upon the findings, providing widespread publicity of what are determined to be the reasons for this favorable result and encourage the exporting of these ideas to other major cities.

(7) On a selective basis, awarding incentive grants for promising experimental or pilot programs to particular public agencies and private organizations which have demonstrated an ability to have a favorable impact on automobile accident or theft experience in their respective communities. Where successful, providing widespread publicity on the results of their efforts and encouraging the installation of similar programs across the country.

Certainly, an important key to the success of the Coalition's efforts will be the extent to which it develops grass-roots public support for its various programs. This, in turn, will be dependent upon its organizing capabilities and also its ability to clearly articulate the importance and value of its accident prevention recommendations in terms of saving lives and reducing auto insurance costs. The public's anger and frustrations need to be positively channeled in the direction of achieving safer and less damageable autos, better traffic law enforcement, better courts, tougher licensing standards, improved traffic controls/signs, and better roads.

Insurance is a complicated business. Accomplishing the objective of satisfying our customers can take us far afield from the basics of underwriting and claim settlement. It involves us in law, politics, and technology. But if we want to survive as an industry, we really have no choice. If we do not do it, who will?

Gerald L. Maatman is President of Lumbermens Mutual Casualty Company, American Motorist Insurance Company, and American Manufacturers Mutual Insurance Company, Long Grove, Illinois. This article was prepared at the request of the Editor.
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Author:Maatman, Gerald L.
Publication:Journal of Risk and Insurance
Date:Sep 1, 1989
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