Good morning, Mr. Chairman and members of the Joint Committee. It is a pleasure to testify before you on this important topic.

      My name is Bob Hunter. I am Director of Insurance for Consumer Federation of America, a federation of over 240 pro-consumer groups with a combined membership of more than 50 million Americans. The groups that make up CFA range from tiny, single county consumer groups up to very large groups such as the AARP and Consumers Union.

      I am a property/casualty insurance actuary. I am a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. My experience is almost 40 years in the insurance business. I was a supervisor in automobile insurance ratemaking for a forerunner organization of what is now the Insurance Services Office. I served over ten years in the private sector, from 1959 to 1971.

      I came to Washington in 1971 as Chief Actuary of the Federal Insurance Administration. I became Administrator of FIA in 1974. During my time at FIA, I worked with the Department of Transportation on the no-fault auto issue and assisted in the effort to create a national no-fault auto insurance system in the nation. I was part of the team that convinced both Presidents Ford and Carter to support such a plan. I continue to be a supporter of good no-fault systems, as I define "good" below.

      I left the federal government in May of 1980 to create the National Insurance Consumer Organization, which I served as President on a pro-bono basis for 13 years (I consulted as an actuary for governments and consumers of insurance, not insurance companies, to feed my family).

      In 1993 and 1994, I served as Insurance Commissioner for the state of Texas.

      Since 1994, I have returned to Washington to resume my private actuarial practice and to serve CFA on a pro-bono basis.

      Consumer groups usually oppose what is known as "tort reform" because the usual form of tort reform restricts the rights of victims and offers nothing in return to consumers. No-fault is significantly different, in my view, and many consumer groups support "good" no-fault reform.

      Why is no-fault different? There are several reasons:

1. There has been careful study of how the current tort system works for auto insurance and consumers see that, while a person with small economic losses may get more than those losses in recompense for his or her injuries, seriously injured victims of car crashes get only a small percentage of the economic damages out of the system. No such careful research exists for product liability and other proposals to alter the legal rights of Americans.

2. In most proposals to alter the legal rights of Americans, there are only limits on rights and nothing in return for victims of injury. In no-fault auto, good no-fault offers a quld-pro-quo -- excellent benefits. In my view, good no-fault offers unlimited medical and rehabilitation benefits such as found in Michigan in exchange for the giving up of the right to sue for injuries below a strict verbal threshold.

3. There is no apparent need to use contingency fees and the courts to balance power between parties. Unlike, say, product liability where a large manufacturer has a stable of legal help at the ready when injuries occur and the typical consumer of the product does not, the typical parties in an auto accident are roughly in the same boat. They have no lawyers at the ready, they do not deal with accident situations all the time, they are roughly equal in power after a fender bender.

      Choice no-fault has not gained consumer support in the many years it has been pushed and defeated at the state level, however. The reasons are rather straightforward and are addressed here.

      Because we have the research, we know we are adequately compensated only below about $25,000 of economic damages. Up to that amount, consumer/victims of auto accidents receive at least $1.00 for each $1.00 of economic loss. Above that amount victims receive, on average, under $1.00 for $1.00 of economic loss. Most choice plans offer no change in the legal system where consumers receive too few dollars to compensate but take away benefits where consumers are adequately compensated.

      In other words, Choice is designed to minimize consumer benefits. It is not a fair trade off for giving up your right to sue.[1]

Worse, Choice is really not a choice at all. What is offered is not a choice between "traditional tort" and no-fault, the bill's language to the contrary notwithstanding. What is offered is two forms of no-fault with one disguised as tort.

      Here's why: if I choose tort because I am an excellent, careful driver so that I want to be responsible for my actions and have others responsible for theirs, and I got hit by a reckless driver who chose no-fault. I cannot sue that driver. I must seek recovery from my own insurer under the so called tort maintenance (TM) coverage. Thus, the costs of the misdeeds of the no-fault driver in this example will be externalized into the tort purchasers insurance pool.

      The reason the driver in this example chose tort, internalization of costs he incurs, has been defeated. Choice is, I emphasize, essentially two forms of no-fault.[2]

      Another reason consumers oppose Choice is that it is confusing. Why have this bifurcated system when you really are adopting no-fault? Why not just bite the bullet and adopt good no-fault instead of this confusing form of it. Why not adopt a Michigan sort of plan for the nation? It works well for Michigan. It takes care of the truly hurt and eliminates the vast majority of lawsuits. It holds costs down.

      The proof of the confusion that Choice brings to the market is clear from the bill itself. Why else would you immunize agents, insurer employees and others from legal action if the consumer, after an accident, realizes he or she was misled in making the purchase?[3]

      Buying auto insurance is confusing enough without having to choose between competing no-fault regimes. Consumers have to determine price, service and solvency rankings to find the best insurer. Most do not shop from more than one provider. Consumers are faced with a strange combination of boredom and intimidation today. Choice will weaken consumer knowledge and, thus, weaken competition.

      Another problem with choice is that it gives the insurer undue power in the settlement of claims. For example, the bill allows the insurer to require arbitration of disputes over claims[4] but offers no bad-faith option if an insurer treats claimants abusively in denying or delaying claims payments. If you create any no-fault system, I believe that the key to consumer protection is the bad-faith option when the promise of prompt payment of legitimate claims is abused.

      A final question: Why adopt a "national" approach that your own data indicates will apply to only 22 states? Section 6 (b) (1) (A) states that the Act does not apply in any state where the changes do not lower "...statewide average motor vehicle premiums ... by an average of at least 30 percent for persons choosing personal protection coverage...."

      According to Table 2 in the Joint Economic Committees' "Improving the American Legal System: The Economic Benefits of Tort reform," the states of Arizona, California, Colorado, Connecticut, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New Mexico, New York, North Carolina, South Carolina, South Dakota, Texas, Washington, West Virginia and Wisconsin would be the states that would qualify under the minimum 30% savings rule. Since this Table 2 is predicated upon a 100% switch, this is the average savings for those "persons choosing personal protection coverage" so that means that more than half of the states would not be impacted by this bill.

      If no-fault delivers benefits faster and cheaper, why limit these benefits to under half of the states. although I oppose Choice. If you adopt it you should not have such a limitation.

      For your information, I undertook to do a bit of research over the weekend (I was told I'd be a witness last Friday). The information is contained in the attached two exhibits.

      Exhibit 1 shows the 1995 data on the costs and profits of the private passenger car insurance market in the most recent year compiled, 1995. This is interesting for a couple of reasons:

1. Savings outside of benefits (called "losses incurred" on the exhibit) are little under Choice. If the new no-fault claims settlement costs (called "loss adjustment expense" on the exhibit) could be as low as the cost to settle physical damage claims (doubtful given the more complex nature of people damage as compared to vehicle damage) costs would fall by 2.9% (12.0%-9.1 %). The way ratemaking works, that would drop overall personal auto insurance prices by 1.5% (liability only -1.7%). This proves that the Choice savings are almost entirely benefit reductions, not efficiencies. This is consistent with Rand who found that the "costs of compensating victims who elect (no-fault) under the Choice plan would be at least 60% less" than tort.[5]

2. In order to achieve an overall 30% reduction in personal auto costs, the liability part of the premium would have to be reduced by 54.2% ($102,482 * .3/$66,651). Given that the savings for efficiency are less than 2%, benefits paid to victims must be reduced by over 50% to achieve the bills price goals.

      Exhibit 2 shows four things: the current legal regime for auto insurance, the liability price change ranking for the most recent 5 years, the most recent year rank for liability price level and the most recent year rank for no-fault physical damage price levels.

      Overall there are 27 tort states (53%), 14 no-fault states (27%) and 10 add-on states (20%).[6] Over the five year period studied in the National Association of Insurance Commissioners' (NAIC) report, there is no clear pattern as to how liability (including no-fault in those states with no-fault) rates have risen by type of law. Of the ten highest price increase states 4 (40%) were tort, 3 (30%) were add-on and 3 (30%) were no-fault. Of the ten lowest price increase states 6 (60%) were tort, 1 (10%) were add-on and 3 (30%) were no-fault. If anything, tort states had a slightly lower rate of change than no-fault and add-on states, but this is not significant enough to conclude anything, in my view.

      More important information exists in the two columns that show the 1994 price rankings. If we look at collision price levels as indicative of the underlying price for a no-fault, no lawsuit system for each state, we would expect that, if the legal system selected for liability or no-fault had no impact, then each state would be ranked in the same order as collision.

      What we find, however, is that there are significant differences in the rankings of the liability (including no-fault where applicable) prices than the collision prices. As anticipated, add-on states tend to have higher rankings for "liability" than for collision. Indeed, 9 of the 10 add-on states had a higher liability ranking than the collision ranking. Thus, add-on no-fault is costly.

      What is unexpected is that, of the 14 no-fault states, 8 have higher liability rankings, 5 lower and 1 identical. No-fault seems, by this test, to be more costly than a neutral system.

      Tort states show that 6 of the 27 tort states have higher relative costs for liability than for collision, 18 have lower and 3 are identical. By this test, tort has lower costs.

      I believe that this is due to low thresholds and otherwise "faulty" no-fault. Choice, I fear, would produce similar results, given the low benefits and the incentives in choice to reach the low tort thresholds in the bill.

      Michigan succeeds under this test. Ranked 4th in the nation in collision prices, Michigan's liability: (no-fault) cost is 26th. And Michigan gives victims the remarkable unlimited no-fault medical and rehabilitation benefits. Good no fault works! Bad no-fault, such as Choice, does not.

      I would be pleased to respond to any questions you might have.

Endnotes

1. Just a word about our legal system. It has been beaten up very badly by stand-up comics and the like over recent times. But America's legal rights are the finest in the world. Just like civil rights and our other great traditions that are the envy of the world, our legal rights are precious. Any alteration of these rights, rights that guarantee that poor people can got an attorney and that imbalances in power do not decide outcomes, must be done with extreme care. Pain is a real injury, so is suffering. Most of us have had a small burn. Imagine it over 2/3 of your body, as an example of the reality of this. Or, imagine losing one deeply loved in your home. These are real injuries that, if removed, must have substantial benefits to replace their value.

2. In the bill, the TM coverage is described as definition number l8. The immunization for the reckless driving no-fault insured is found in Section 5 (b) (2) (B) (ii) - To be sure, if a tort selector hits a tort selector, tort as we know it exists. But the approach is hardly what it claims to be when it is called "traditional no-fault."

3. Section 5 (d).

4. Section 5 (e) (6).

5. "The Effects of a Choice Auto Insurance Plan on Insurance Costs" Rand, 1995.

6. An "add- on" state is one which allows both normal tort and no-fault benefits. In that both systems run at the same time, one would expect the costs of an add-on system to exceed the costs of tort alone or no-fault alone.

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