Auto Choice Savings Overstated, Actuaries Tell Congress
12 August 1998
Auto Choice Savings Overstated, Actuaries Tell CongressWASHINGTON, Aug. 12 -- Legislation to create first-party personal protection coverage, currently under consideration as an alternative to traditional automobile insurance, may not reduce costs as much as hoped by its sponsors, the American Academy of Actuaries reported to Congress this week. The Academy issue brief analyzes H.R. 2021 and S. 625, bills introduced by House Majority Leader Dick Armey (R-Tex.) and Sen. Mitch McConnell (R-Ky.). The legislation creates personal protection coverage (PPC) that reimburses insured individuals for economic loss resulting from auto-accident injuries without regard to fault. Individuals who opt for such coverage may file a claim against an at-fault driver only for economic losses over and above those reimbursed by the personal protection coverage. Bill sponsors contend that PPC will reduce costly litigation while quickly compensating injured individuals for lost wages, medical expenses, and other costs. Savings estimates have ranged as high as $246 billion over five years. However, according to Michael J. Miller, leader of the Academy study, many individuals will not switch to PPC, and therefore cost savings may be limited. "Typically, the most popular type of coverage in each state is the default option, which is issued to individuals who do not select a specific type of coverage," Miller says. "Because PPC is not the designated default option in the legislation, many people can be expected to continue with their current type of coverage." The legislation could also mean higher auto insurance costs for individuals and families. "Currently, a driver who causes an accident is responsible for the losses incurred by individuals in other vehicles," Miller says. "The proposed PPC system would shift those costs to the driver of the not-at-fault vehicle. Because heavy commercial vehicles typically do more damage to passenger vehicles than vice versa, the net effect of PPC will be to shift insurance costs from commercial enterprises to private individuals." The Academy report notes other bill provisions that may boost costs. For example, in the absence of clear language to prohibit so-called limit stacking, the adding together of coverage limits for a single claim, the bill opens the door to double awards for a single injury. In addition, the Academy calls for clear statement of the underlying assumptions of the bill's costing model and publication of cost estimates based on sensitivity testing. The American Academy of Actuaries is the public policy organization for the actuarial profession in the United States.