Simply Junior

Looking around the US, all but three states mandate drivers to carry liability insurance. Some states have no-fault schemes. Others add in a requirement to buy a personal injury protection policy. As the healthcare reform bill was signed into law, many asked whether all insurance mandates were unconstitutional. This is a fun debating topic which sounds possible but will get nowhere. States have always had the right to impose conditions on people’s voluntary activities. If you want to drive, you have to carry liability insurance to pay compensation to anyone else you may injure. A more interesting question is the amount of the minimum requirements imposed by your state’s lawmakers.

Most of these minimums have not been changed for thirty and more years. For example, in 1972, Maryland set $20,000 for a person injured subject to a maximum of $40,000 for losses arising out of a single traffic accident. This was intended to cover medical treatment, loss of earnings while recovering, and so on. In 1972, the average annual salary was $12,000 and most hospitals charged no more than a few hundred dollars for treatment. Most new vehicles cost less than $4,000 to put on the road. You could easily buy a new home for less than $30,000. Looking back now, you wonder how we managed on so little money. Prices have risen fast for medical treatment. Injure the wrong person and the claim against you for loss of earnings is going to be frightening. Why should this matter?The liability coverage only pays out the minimum. You get to pick up the bill for all the other losses. So any savings or property you have may be taken to satisfy a judgment against you.

Should states increase their minimums? Many are thinking about doing so, but the politics of actually making new laws is difficult. During the recession, people are under financial pressure. Forcing them to spend more on vehicle insurance is not going to be popular among the poorer sections of the electorate. For the middle classes, there is the option to buy more coverage including an uninsured and underinsured policy. This is the American way. Those who have money can use it to protect themselves against losses. Those who are poor must take life as it comes.

In Maryland, the legislators have just increased the minimums to $30,000/60,000. This is curiously unreal. An increase to match the rate of inflation since 1972 should make the minimums $100,000/200,000. But, the political situation does not permit the lawmakers to restore the value of the minimums overnight. The answer was annual increases to inflation-proof the amounts. We would have arrived at $100,000 without anyone being too upset about it. But we have grown used to accepting the cheapest solutions even though millions of people across America actually lose money because of it. Why millions of people? These are all the victims of bad driving who never recover anything more than the minimums and suffer major financial losses as a result. This is injustice on a massive scale. And it will never be cured because it would cost too much to make the necessary increases. The only people who come out of this smiling are the investors in the auto insurance industry. Their profits and dividends have been rising steadily despite the recession. To protect yourself, always get auto insurance quotes from this site to find the most affordable coverage. Insurance may be mandated but you don’t have to pay excessive premiums.

The business of insurance is called underwriting. The company enters into a contract (called a policy) and agrees to indemnify a group of people like you against defined losses. So it uses some heavy duty math to work out the probability of the losses being incurred. It’s called risk assessment and relies on a complicated use of statistics. For vehicle insurance, the companies collect the details from every reported traffic accident in the US looking at the age, sex and occupation of the driver, the make and model being driven, the time of day, the road conditions, and the extent of the damage. The insurers share the information on the current costs of replacement parts and the labor to fit them.

They also manage to talk the health insurance companies into sharing their current costs on medical treatment for those injured in traffic accidents. With all this information, they can make good estimates of the cost of loss, i.e. the total amount they may have to pay out if they insure, say, 100,000 drivers. They take this estimate, add the cost of running the insurance company and a profit margin. This total is then divided between all the 100,000 as their premiums. Some companies divide the total equally so the good drivers subsidize the bad. But the majority adjusts the individual amounts based on the driver’s safety record. That way, each policy holder pays more or less depending on how well he or she drives. This is more fair.

But, to cut costs, some insurance companies make more general assumptions about the likelihood of losses. Instead of personalising the risk assessment, they focus the assessment on generalities. The most common is the use of the zip code. In some areas of a town or city, there are higher levels of vehicle theft and vandalism. Some areas have more people driving while intoxicated or impaired through drugs. Because of the design of the local road system, there may also be a higher number of accidents. The insurers therefore charge everyone living in those areas a higher premium. Apart from the unfairness at an individual level, some lawyers believe it is active discrimination because many of the zip code areas loaded with higher premiums have higher concentrations of particular racial or ethnic groups. California has formally prohibited insurance companies from using zip codes, credit scores and other factors not directly relevant to the assessment of driver safety. In those states, insurers continue to trade and make a profit. It has not been the end of the world they predicted.

So, depending on the US state in which you live, your premium may either be calculated based on your personal driving record, or it may be based on your zip code and credit score. Either way, the task of finding the cheapest car insurance remains the same. You have to shop around the companies licensed to sell policies in your state and find the best deal. If there is active competition between the insurers, the premiums will be lower and you will find cheap car insurance without too much difficulty. But if the state is unregulated and insurers do not compete, it will be more difficult to find a cheap policy.

Welcome to 2010. Look around the states. Yes, they all have different perils for drivers to face. For some, it’s the weather with snow and ice making driving dangerous during winter. In others, it’s hurricanes and tornados. But leaving aside all the different types of peril, there’s one big problem for everyone with a vehicle on the road. All the major insurers are pressing for rate hikes. State Farm, Allstate and Geico have been leading the charge. And we are not just talking hikes of one or two percent. In Florida, for example, State Farm is raising rates by an average of 9.2%, while Allstate went for a shock-and-awe average of 16%. Even though the recession is slowly easing, the US is facing the highest levels of unemployment seen for decades. Rate increases like these hurt everyone struggling to make ends meet. Is this just gouging by the insurers? Like the Wall Street bankers, are they only interested in their bonuses? Should we think of insurance companies as the new carpetbaggers, using political influence to their own crooked ends? Just why are the insurers making such egregious demands for more money when most of us are down and out?

Lining up the questions like this gives little chance of answers favorable to the insurers. Does that make us biased? Hell, yes! Increases like this when the economy is on the bottom will only lead to more people driving without insurance. As more drop out of the legal framework, the premiums rise for the rest of us. The costs stay the same. They are just divided among fewer insured drivers. Worse, we now have to add additional uninsured and underinsured coverage. It costs more for those who want to stay legal on the road. Are there any justifications for these increases? Well, if you ask a talking-head for the insurance industry, the blame gets spread around. We start off with the rise in the cost of medical treatment. It seems the healthcare services have all been hiking their charges to treat those injured in traffic accidents. Evidence? Well, following very public contract disputes in California and Connecticut, we now have the stand-off between United Healthcare and Continuum Health Partners in New York. The hospitals want increases. The insurer is asking for cuts of between 7 and 10%. In these circumstances, the insurers are actually standing up for their policy holders. If healthcare costs can be reduced or held stable, premiums can also be stabilized.

The really big problem, however, is whether the insurers can pay all the claims we make. The insurers have low capital reserves. Why are the reserves so low? Well, it’s back to the recession. When the insurers collect in the premiums, the money is invested until it’s needed to pay out the claims. Just as our 401k investments have taken a big hit, the insurers suddenly found their investments had lost value. Now, the state Insurance Departments are insisting the capital be replaced. In some states, the insurers have agreed to reduce the number of people they insure. In the rest, the premiums are to rise. This means, no matter where you live, it’s going to be harder to find cheap auto insurance. Harder does not mean impossible. Using the search engine on this site, you can still find cheap car insurance, but you may have to look more carefully at the discounts on offer and accept a higher deductible. This may not all be the fault of the insurers, but it sure feels like it.