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Crash cow.

Imagine this scene: Before leaving for a weekend with the family, a guy from the suburbs--call him Bob--turns on his crockpot to slow cook a brisket. The machine overheats, starts a fire and burns up half of his split-level, two-bath/three-bedroom home. A day later a contractor sifts through the rubble and announces that chez Bob's original splendor can be restored for $100,000. No problem. Bob's got insurance. But the agent who last year, all winks and handshakes, sold Bob the policy, soon announces that the insurance company will be writing a check for $45,000, about enough to replace the living room, the linoleum, and the salad shooter. Adding insult to under-reimbursement, the check isn't mailed for six months.

Isn't Bob a sap? Before deciding, consider this: You are Bob. That is, if you are among the roughly 150 million Americans who drive a car and buy auto insurance, odds are that in the event of disaster, you'd get the Bob treatment. A 1991 Rand study which looked nationwide at auto insurance compensation found that people sustaining $100,000 in economic damage--like property damage, lost wages, and medical costs--can expect to receive about $45,000 in compensation. And it'll be a while before you see even that much.

It's just one of the gut-tightening realities of the American auto insurance system. Besieged by lawyers and clotted with the insurance industry's administrative costs, the premiums you pay are disbursed to everyone, it seems, but the folks who need it most. According to a national study sponsored by the California Insurance Commissioner's office, only 45 cents of the average insurance dollar goes to car repairs and hospital bills. More than a quarter of those in accidents don't recoup their medical costs from their insurers, and the heftier those bills are, the more of the tab you have to pick up yourself.

What's gone wrong? Consider a typical accident. Driver X, waiting in traffic to take a left, collides with Driver Y. Exchanging phone numbers over a steaming radiator, X thinks that Y should have seen him making the turn, and is certain that Y was speeding. Y, for his part, was stunned by X's left and believes X should be stretched on a rack. The truth, as with many accidents, is somewhere in the middle, but to get money for damages, X and Y will need to prove in court that the other guy is entirely at fault. Both men hire lawyers and a brawl as American as slapstick begins.

It'll be an expensive fight, and not just for the litigants. In 1992, there were roughly four million two-party accidents involving injuries and in a little over one third of those incidents, a lawyer got a job. Naturally, a system that relies on lawyers and the courts to settle car claims--the tort system, as it's known--is expensive, and insurance companies simply pass on the costs to everyone else in the form of higher premiums. Roughly 19 cents of your premium dollar covers legal fees.

These fights are not simply over actual out-of-pocket expenses, like car repairs and the price of whiplash, but for the mental trauma of the ordeal and the injury. Pain and suffering awards are usually a multiple of medical bills, which means they create a built-in incentive to perpetrate fraud--i.e. fake it with one of those nothing's-broken-but-trust-me-it-hurts soft tissue injuries--or find the most expensive treatment possible. A Los Angeles County study of health care visits for neck and back strain injuries found that in those instances where a tort claim was involved, a doctor or chiropractor was seen 26 times at an average cost of $4,000 per claim. Nationwide, when the same injuries are involved but there's no lawsuit in the offing, the average number of visits is between two and three. Similarly, a study of Hawaii's auto tort cases found that claimants averaged 58 visits to the chiropractor, with one quarter of those injured visiting at least 84 times each.

We've created a system that gives people involved in accidents a good financial incentive to get a lawyer, seek therapy, and go for the gold. What we end up with is a lot of Bob-types who don't get sufficient money to cover large, concrete losses, and scores of aspiring litigants who are overcompensated for less serious injuries and mental anguish--some of which is real, some of which is mild at best and fraudulent at worst. About 9 cents out of each insurance dollar you mail in is for somebody else's pain and suffering.

The kicker is that the present system would gouge consumers even if nobody got in accidents. That's because insurance companies spend millions on advertising to get you in the door, and even more on the salaries and offices of retail agents who gladhand you to the dotted line. Add to that the price of paperwork and postage for handling millions of car insurance policies individually, and you get some idea why 23 cents of your premium dollar is consumed by insurance company overhead. Considering that you just want these folks to cash your checks and pay something back when you get in a wreck, they aren't cheap.

Present arrangements have a short list of clear winners: the lawyers, (who usually get one third of the victim's winnings), the lucky (those hit by someone rich or well insured and clearly at fault), and the insurance companies (who make money regardless). The list of losers runs a bit longer. It's everybody else. Drivers pay too much for policies that won't adequately reimburse them if they really got hurt, and the millions who can't afford to abide by the law opt out of the system entirely. Nobody knows exactly how many uninsured motorists there are, but the Insurance Information Institute estimates that 17 million are on the road today. Californians alone spend $1 billion each year to insure themselves against accidents with uninsured drivers.

All of which makes successful reform easy to imagine. It would drag lawyers from the trough, reduce insurance overhead, direct money to those with real losses, and make coverage more affordable. Fortunately, two ideas with just those ambitions exist: One is a variation of a system that is already working in Australia which, with tinkering, could work here. The other, Pay-at-the-Pump No-Fault Insurance (PPN for short), is now being pushed by a guerilla band of consumer advocates in California. Each reform has its respective advantages; either would vastly outperform the system we have now.

Kangaroo Coverage

Australia's six states have a variety of insurance schemes, but the basic outlines of the system in the state of Queensland are what could be transplanted here. Instead of purchasing policies through agents, drivers pay for insurance when they renew their registration each year. The government--specifically, the Motor Accidents Authority (MAA)--then sends these funds to the drivers' private insurer of choice.

Here's where the tinkering comes in. Premium prices in Queensland vary by place--i.e. cheaper in the country, more expensive in the city--but within different areas, costs are mandated by the government to be the same for young and old, good driver and bad. This one-price-fits-all approach is a problem: it prevents insurance companies from competing for business (and keeping down prices) and it means good drivers are subsidizing bad drivers. Also, by letting consumers pick their carriers, overhead costs like sales agents and advertising aren't eliminated. The trick is to let the system account for riskier drivers in a way that prevents insurers from pricing themselves so high that the uninsured can't afford coverage. At the same time, you've got to keep unnecessary costs out of the equation.

There's a solution to both problems. The insurance commissioner in each state could divide motorists into five to 10 thousand-person pools that have the same mix of good and bad drivers. Insurance companies would then compete to cover these pools. The commissioner would take bids and parcel out business based on price, coverage, and past performance. Meanwhile, a driver's risk profile could be accounted for in this way: The same computer that now spits out a cost for your annual registration fee based on the model and year of your car could take into account factors--like past accidents, age, locale--that make you a greater risk. Thus, an insurer's prices would be more affordable (because of diminished overhead), but there would still be a correlation between the risk companies took on and the funds they receive from the state. Also, consumers who are safer pay less instead of subsidizing riskier drivers.

PPN is a variation on the same theme. Instead of paying at registration, drivers would buy insurance every time they filled up with gas through a per-gallon surcharge at the pump. The money collected at the pumps would then go directly to the state insurance commissioner (much the way the government now collects gas taxes) and then be farmed out to insurers under the same driver pool system.

An essential component for either system is this: Coverage would be no-fault, which means that the entire question of who is to blame for a given accident would be moot. If you got in a wreck and damaged your car, you'd get money from your insurance company to fix it. If you racked up a huge medical bill, your company would pay that, too. Gone is the need to sue anybody. Gone also would be awards for pain and suffering and along with them the incentive to defraud insurance companies. Instead, what you'd get is full and fast reimbursement for your losses, all medical costs, and lost wages.

Thus, no more insurance agents and no more lawyers.

In either system, the major winners would be consumers. Remember, by eliminating legal costs, insurance overhead, and those mental anguish outlays, you've taken back what now consumes roughly half of each premium dollar. Yes, your state insurance commissioner will have to hire more people, but keep in mind that the infrastructure for either idea is already in place. The government is already taking in registration fees from drivers and collecting gas taxes at the pump.

Nobody has studied how much the Australian system would cost American drivers, but Andrew Tobias, a Time financial columnist and PPN's leading proponent, contends that a no-lawyer, no-salesman system would reduce costs enough to offer people better coverage at a lower price. He's probably right.

The rosiest estimate of the gas surcharge is 15 cents a gallon. Oil companies have suggested sums as frightening as 40 cents a gallon. Let's use their number. Now, the average driver in California gets 20 miles to the gallon and covers 12,000 miles a year; that's 600 gallons consumed annually. At 40 insurance cents per gallon, the average driver would pay $240 a year for coverage. Obviously, if you drive more or own OPEC-friendly vehicles, you'll pay more. But guess how much we pay for insurance per gallon now? Take the total we spend on auto insurance in a year ($102 billion, according to Best's Insurance Management Reports), divide it by the number of gallons we consume (I 12 billion, according to the American Petroleum Institute), and you realize we're already paying about 90 insurance cents per gallon. Factor all of those uninsured drivers out of the equation--they buy gas but not insurance--and lo and behold, we're already spending about one insurance dollar per gallon. That's for a system which pays forty-five grand on $100,000 of damages.

The Aussie system's advantage is that it allows you to charge riskier drivers more. This approach also ducks the arguments traditionally leveled at gas surcharges: They're regressive and could hurt the economy if the price of gas spikes again. It's also less likely to rouse the lobbying dollars of Big Oil, significant because the plan doesn't lack for natural enemies already.

PPN's advantage is that it connects the price of insurance to use: The more you drive, the more you pay. This is not just a good idea for obvious environmental and balance of trade reasons, but it's also fair because people who drive more are more likely to get in accidents. Currently, the daily commuter pays about the same as that enduring used-car-lot stock character, the little old lady who only drives on Sundays. Because PPN allows people to buy insurance in one and two dollar increments, it's also a bit more merciful to the poor. (On the other hand, insurance-registration fees could be paid in more manageable installments.) PPN also instantly solves the uninsured motorist problem. There's no need to have cops ticketing those uninsured millions with dated registration stickers--if you want gas, you've bought insurance.

That's the quick pitch. Any questions?

NO-FAULT?! What kind of sick idea are you pushing, mister? If you ruin someone's life in a car wreck you oughta pay through the face.

True. Robert Lembo, a spokesman for the American Trial Lawyers' Association, is right when he says that "The fault issue is intellectually important. Those who do wrong should pay for that wrong." But those who do wrong now don't pay; their insurance company does. Sure, companies can hike bad drivers' rates, but most of the cost of those pain and suffering settlements gets spread around to everyone else. Should you pay for Joe Blobs' negligence? Anyway, using a civil suit to punish bad driving could scarcely be more unwieldy and wasteful. Why not really punish and discourage bad driving by stiffening criminal penalties with fines or jail sentences--the sort of punishments attorneys wouldn't want a third of. The trial lawyers have spent years and millions of dollars tarring no fault as amoral. But it doesn't do away with accountability so much as move that issue to a more efficient arena--the justice system.

But when people get really banged up isn't it right to pay them for their pain and suffering?

Sort of. Giving large sums to victims of negligent driving is an appealing idea. But right now large settlements are awarded unfairly because to get one, the offending driver has to fit a very specific profile (clearly at fault and well-insured or rich). What about victims of uninsured motorists? What about when a driver is only covered up to $30,000 and the victim has $100,000 in medical bills? What if liability is shared? What if you hurt yourself hitting a tree? Under today's system, if you incur a few hundred thousand in medical bills and the right--and rare--circumstances aren't there, you're screwed. Which means that a multitude of under-reimbursed drivers are subsidizing the few winners in the pain and suffering lottery. If you like the idea of pain and suffering payments, here's another way to think about it: No-fault rules are unfair, but they're justice itself compared to the inequities of the tort system.

Is no-fault coverage an improvement?

Several states have no-fault auto insurance systems, but they aren't real no-fault. The trial lawyers' lobbying muscle has consistently convinced state legislatures to allow people to sue if some threshold of injury or financial damage is reached. In other words, you can't sue for pain and suffering unless your medical bills are larger than a given sum. But even watered down no-fault systems outperform those that rely solely on lawyers and torts. Michigan, for instance, switched to a no-fault system in 1973 and saw the amount it paid to lawyers dwindle from 32 percent of premium dollars to four percent, and the amount it paid to claimants rose from 48 percent of premium dollars to 73 percent. In New York, after no-fault rules took effect, auto-injury court filings plummeted by 80 percent as premium prices shrank by 6 percent. The recent Rand study corroborated these numbers, finding that those states with the best no-fault systems do vastly better at providing fairer, faster compensation, especially at the high end of losses. The states studied were nearly twice as likely to fully reimburse drivers with economic losses and were also far more efficient. "The bottom line," concludes Rand, "is that no-fault approaches to compensation can yield substantial savings over the traditional system." True no-fault systems would improve performance specs even more.

Wouldn't these systems eliminate consumer choice?

Yes, which is one reason that the insurance companies would oppose them both. "Not everybody wants to buy from the lowest bidder," says Marc Rosenberg of the Insurance Information Institute, the industry's trade association. Well 1, for one, would like to buy from the lowest bidder. To justify their front line agents, insurance companies like to think we want a warm, personal relationship with their salesmen. Actually, we just want to know that our carrier will deliver when we have an accident and that it isn't ripping us off. Who shops for car insurance with anything else in mind?

The key is making sure that insurance companies are delivering good service. With either system a simple measure could make carriers more responsive than they are now: Insurance commissioners could tally complaints and penalize companies that aren't performing. Today when you gripe to your insurer, you can only threaten to take your money elsewhere. But if you were part of a large pool of drivers and found your carrier's service wanting, your complaint, added to others, could jeopardize not just your business but that of a few thousand policy holders.

If drivers insisted on being able to choose their carriers, they could be accommodated. The plan now being pushed in California keeps consumer choice intact by issuing coupons which drivers can redeem with their preferred carrier. The same approach could be used with the Australian system. Of course, that means agents are back in the picture and costs go up.

Won't the gas surcharge wreak economic havoc?

No. In fact, one of the strongest arguments for both systems is that they'll be a boon to the economy because they would leave billions in consumers' pockets. The oil spikes of the seventies caused problems because people were spending more money at the pump without anything to offset the expenditure. With PPN, yes, you'll pay more when you fill up, but your costs over a year will go way down. (Remember, right now you spend a dollar per gallon for insurance in large, semi-annual payments.) As a country, we spend over $100 billion a year for car insurance. Carving away unnecessary labor and overhead costs and eliminating the incentive for fraud could save us upwards of $30 billion every year. That's $30 billion more for everyone to spend on a more efficient part of the economy. Maybe you'd choose to spend your windfall on insurance agents and lawyers. But probably not.

Most trucking lines will spend less on insurance with PPN. Some of the huge rigs would end up spending more because they get such lousy mileage. But most trucks that size use diesel, which could be exempt from the gas surcharge, and truck companies could pay the insurance commissioner a fixed sum based on use. (If that prompted car manufacturers to build diesel cars, we could set up a rebate system for large-fleet trucking lines.) Everyone else is going to spend less for insurance, and truckers shouldn't be an exception, especially because they'd just pass on any added costs to everyone else.

Under PPN, big, safe cars pay more for insurance than small, less safe cars. Why should there be a disincentive to drive a safe car?

Under PPN, gas guzzlers, which tend to be large, safer cars, would pay more for insurance. But not that much more. The Cadillac Fleetwood, for instance, gets 17 miles to the gallon. Using California's averages, a Fleetwood would spend $42 a year more on insurance than the average car--probably not enough to put off anyone undaunted by the Fleetwood's $37,000 sticker price.

Still, PPN does not preclude cost adjustments a la Australia. Not only could high risk drivers get charges added on at registration, but, if people demanded it, there's the option of giving safer cars a price break.

Doesn't getting the government involved in all this sound a bit BOLSHEVIK?

These ideas make as much sense as group health care. In fact, you can think of either plan as a sort of managed competition for your car. Managed competition, whatever its merits turn out to be, is an approach now touted as a private sector solution to produce universal health care and free market costs controls. Insurance companies, not the government, would be your insurer.

High-Octane Coverage

Nobody has tried the pay-at-registration idea in this country, but even insurance executives down under say the basic principle works. "Queensland's motorists are generally quite happy," says Graeme Adams, a senior manager at the National Roads and Motor Association Insurance, one of Australia's private insurers. But because the plan does not account for risk, insurers hate it; where it has been tried elsewhere in the country the industry has fought to change the system back to pay-the-insurer.

Those lobbying efforts would undoubtedly seem genteel compared to what would happen in this country if either of these reforms were attempted. Just look at the response to the nascent push for PPN in California. The idea's February debut in the state legislature looked like a rub-out scene from a Mafia flick. The state's Senate judiciary committee, with some fervent nudging by the insurers and trial lawyers, whacked a PPN bill moments after its birth. "The campaigning began the day we introduced the legislation," says Alan Gordon, an aide to California state Senator Art Torres, who sponsored the legislation. "It was an ugly death." A coalition of consumer advocates spearheaded by the Coalition for Common Sense Auto Insurance, a group funded by Andrew Tobias, is now working to pass PPN as a ballot initiative come November '94. (Tobias, who apparently has taken advice from his own best-selling personal finance books, is spending his own money to reform a system he has railed against for years.)

On the other end of this power see saw are two of the heaviest, deepest pocketed lobbying armies ever to encircle a state capital. Last year, the trial lawyers' California PAC gave $716,722 to state legislators and the insurance industries' gave $604,980 (making them the fifth and seventh most generous, respectively). Insurance companies have pled for no-fault reform for years, and most carriers, after shedding local agents, could expect to do well under either system. But even with the consumer choice variant in play, the industry is dead-set against receiving premiums via the government. The trial lawyers' opposition to PPN is easier to understand; real no-fault reform would send many of them looking for different jobs.

Both industries are so panicked about PPN that in California they have done the unthinkable and pooled their resources. They're part of the delightfully named Californians to Save Our Economy, a group rallied by the state Chamber of Commerce, which has already retained the services of one of California's most accomplished ballot brawlers, Woodward and McDowell. A public relations campaign costing upwards of $100 million is anticipated. "The initiative, whatever they come up with, will be very vulnerable," says firm partner Jack McDowell.

In addition, PPN supporters don't exactly have a lot of friends in high places. Governor Pete Wilson and the other likely candidates in next year's governor's race--with the notable exception of insurance commissioner John Garamendi--are expected to keep mum on the issue or join the other side. And Ralph Nader isn't going to help because he is against any restrictions on the right of access to the courts and thus a long-time opponent of no-fault rules. The consumer laureate apparently arrived at this quasi-religious tenet in the crucible of corporate product liability cases. He's right that the court is a vital leveler when imbalances of power exist between two parties; how else is Regular Guy going to win satisfaction from General Motors? But with auto accidents, unless you rear-end H. Ross Perot, it's hard to imagine power differences so large that a judge is needed. Most fender benders are just driver versus driver. And neither PPN nor Aussie-style would affect access to courts if you were injured as a result of a manufacturer's negligence.

This is the array of forces that either Aussie-style or PPN can be expected to face wherever tried. Against such odds, these reforms may sound a little like peace on earth--good idea, tough to make work. Nonetheless, in the last David vs. Goliath insurance fight, the David side--albeit with Ralph Nader--won. In 1988 in California, roughly the same battle lines were drawn over Proposition 103, the heart of which was a 20 percent rollback of insurance rates. Some of the initiative's elements have become law, others are stuck in court, and for the most part, little changed for drivers. The heartening news for PPN's advocates, however, is that the little guys prevailed in spite of spending $3 million to their opponents' $77 million.

The same populist themes used in the Prop 103 fight will be reprised. "I can see the ad now," says Robert Hunter, the Texas insurance commissioner. "'The trial lawyers and the insurance companies hate it. How bad can it be?'" As Mike Johnson, director of the Coalition for Common Sense Auto Insurance, put it, "You couldn't ask for better enemies."

Car insurance reform will always have good enemies. But from reform's foes you can expect anti-tax buttons to be pushed, creeping statism to be decried, warnings of an economic downturn, everything shy of geological predictions about The Big One. A simple message will have to emerge over this din: The system we now have is atrocious at providing drivers with a real safety net, the reason we buy car insurance in the first place. And now our premium dollars run through so many unnecessary hands that real overhaul could route money to where it's needed and allow us all to keep more dollars in our own pockets. Drivers should know that it is precisely these facts that will stir the opponents of reform to scream so loudly.
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Title Annotation:two alternatives in automobile insurance compensation
Author:Segal, David
Publication:Washington Monthly
Date:Dec 1, 1993
Previous Article:Road kill.
Next Article:Why Alan Greenspan should show you his hand.

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