Today we are having a hearing before the Joint Economic Committee to discuss automobile insurance and tort reform. Every American who drives a car and pays automobile insurance faces a very serious and growing problem. The problem is two-fold: the very high and ever increasing cost of automobile insurance, and second, the failure of the current legal system to promptly and fully protect those injured in an accident.
Auto insurance premiums are too high today and they are increasing faster than the rate of inflation. In 1995, the national average cost for insurance premiums was $757, the last year data are available. In some states, the average premium is much higher. For instance, in the state of New Jersey the average automobile insurance premium was over $1,100. Consumer Reports magazine reported earlier this year that for a family in Cherry Hill with two cars and one child who drives, insurance premiums cost somewhere between $2,500 to $3,500. The same Consumer Reports study showed that the national average cost to insure an automobile rose 44 percent between 1987 and 1994, nearly one and a half times the rate of inflation.[1]
We are holding this hearing today to look into the causes of high insurance premiums and their rapid increase. Even more importantly, we need to examine the possible solutions that could provide American families with much needed relief and would save them hundreds of dollars every year.
I feel it is important to highlight the truly bipartisan and wide-ranging support for auto-insurance reform that has come from individuals, advocacy groups, politicians on the right and left (and the Reform party). This movement began with reformers such as Michael Dukakis in Massachusetts, and was promoted in the last presidential election by Senator Dole and by GOP presidential candidate Steve Forbes. And several reforms have been championed at the state level, led by such Governors as Christine Todd Whitman, who recently proposed a version of Auto-choice for her state of New Jersey.
In this session of Congress, Senators Mitch McConnell (KY) a Republican, is introducing an Auto-choice bill together with two Democrat Senators, Daniel Patrick Moynihan (NY) and Joseph Lieberman (CT). Their Auto-choice reform efforts have received favorable reviews from the editorial boards of The New York Times, USA Today, and The Washington Post. At a time when partisan bickering and personal attacks have soured the political atmosphere in Washington, it is refreshing to find an issue where politicians and groups from across the political spectrum can find common ground.
Last year I authorized the staff of the Joint Economic Committee to study some of the problems with automobile insurance. Their report has given us an insight into some of these problems and examined one proposal for reform, called auto-choice.
The economic benefits of the Auto choice reform are tremendous. The JEC has estimated that the potential savings from Auto choice reform could total around $42 billion in 1997 alone. The total available savings would grow larger each subsequent year, so the $42 billion savings in 1997 would have increased to $52.4 billion by 2001. Over that five year period, Auto-choice would make available to American consumers over $235 billion in savings.
Nationwide, the average insurance policy would drop from $785 to $562 in 1997. That means for the average driver, Auto-choice reform would save them $223 on their auto-insurance payment each year. For many people, that would provide much needed relief. In many high-liability states, however, the savings would be significantly greater. New Jersey drivers, who pay the highest insurance rates in the nation, would save an average of $417 a year.
I would like to emphasize that Auto-choice reform would be especially beneficial for low-income drivers. Research done by RAND indicates that low-income drivers would save significantly more on auto-insurance than the average driver. While the average driver could see savings around 28 percent, low-income drivers would experience, on average, a 45 percent reduction in their premiums.
The JEC study found three major causes of increasing car insurance premiums: fraud, high litigation costs, and escalating non-economic damages. While the issue of high litigation costs is an obvious problem, the few studies that have focused on this topic have shown how significant transaction costs can be on the cost of automobile insurance premiums. A 1990 study by the California Department of Insurance found that over 40 cents out of every premium dollar paid for bodily injury liability and uninsured motorist coverage goes to attorneys.[2]
A second problem is fraud and abuse of the auto-insurance system. After an FBI investigation into auto-accident fraud, Director Louis Freeh estimated that "every American household is burdened with more than $200 annually in additional insurance premiums to make up for this type of fraud."[3]
The bi-partisan bill that will be introduced in the Senate by Senators Mitch McConnell Joseph Lieberman and Daniel Moynihan attempts to resolve several of these problems in the current auto-insurance market. Their Auto-choice reform is a federal solution that would change the insurance laws to allow individuals to select from two types of auto-insurance coverage. Under the current system everyone is required to buy third party insurance coverage for economic damages (property, medical, and lost wages) and non-economic damages (punitive awards and pain and suffering).
How does Auto-choice lower premiums? The auto-choice bill would give drivers a choice between retaining their state based insurance system or changing to a first-party, no fault insurance option. Under the new option, drivers would recover damages from their own insurance company, so consumers would only need to protect themselves.
The Auto-choice bill calls the new option Personal Protection Insurance (PPI), in which drivers would receive first party coverage with immediate, full payment of economic losses regardless of fault. In return for this immediate recovery and lower premiums, they would opt not to be able to recover for non-economic damages. In addition to the lower premiums, Auto-choice would reduce incentives for fraud, reduce transaction costs, and help low-income drivers enter the insurance system
The second option, Tort Maintenance Coverage (TMC), would be chosen by consumers who prefer their state's current laws for recovery of economic and non-economic losses (37 states have fault-based, the rest have different forms of no fault). Under the TMC option, drivers would retain the same amount or types of recovery as provided in the insurance laws of their state, unless they had an accident with a PPI driver. In that case, they would receive first-party coverage up to their own TMC policy limits.
Under both options, injured parties could sue for economic and non-economic damages against drivers who commit intentional torts or when the accident is due to alcohol or drugs. And both options would allow drivers to sue in court, on a fault basis, for economic damages that exceed their insurance policy's coverage limits.
Another significant part of the Auto-choice reform bill was the tremendous sensitivity and deference paid to the states. All state legislatures would be given the ability to repeal the bill by a simple majority. Or the federal law could be modified by passing changes in that state's legislature. Finally, the state insurance commissioner could prevent the law from taking effect in a state if the commissioner could certify the state would not experience a 30 percent reduction in bodily injury premiums.
As we listen to the testimony this morning, the causes of increasing auto-insurance premiums will become clearer. And though we may not have perfect agreement on the solution, I hope we will all agree on one thing: We need reform, and the millions of Americans paying exorbitant auto-insurance premiums need reform NOW.
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