Academic journal article Journal of Risk and Insurance

A Proposal for Change: Affordable Automobile Insurance

Academic journal article Journal of Risk and Insurance

A Proposal for Change: Affordable Automobile Insurance

Article excerpt

A Proposal for Change: Affordable Automobile Insurance


The insurance industry is failing to satisfy its urban auto insurance customers' affordability needs. Ths has contributed to a serious industry image problem. The public is demanding that the industry find a solution. A National Coalition for Auto Safety is proposed involving insurers, consumer groups, and safety interest organizations.

Operating at both the national and state levels, the Coalition would mount a comprehensive attack on auto accident costs encompassing auto damageability factors, occupant protection measures, driver behavior modification, traffic law enforcement, and various other elements of our urban traffic systems.

The primary purpose of any business must be to identify and satisfy the needs of its customers. That is its reason for being, and if it can not perform satisfactorily, then it will not survive long in the marketplacE.

In recent months, in too many places and for too many people, our industry has been failing to satisfy its customers, not because it does not have hard-working people, good systems, or sufficient capital, but because it has not been sensitive enough to the need for affordable insurance. The result has been a weakening of our image and credibility with the public. This conclusion is well documented in the results of a recent survey by the Opinion Research Corporation. It showed that the public put the property-liability insurance business third from the bottom when asked to rank the image of 24 major industries. Only the tobacco and nuclear power industries got lower ratings.

Suits filed against several major insurers and ISO by the attorneys-general of some 19 states alleging a massive insurance industry conspiracy certainly have not helped, though many people have no clear notion of what the charges actually involve. On another front, the passage and subsequent judicial approval of most provisions of Proposition 103 in California have not only created a major threat for us in our largest and fastest growing market, but are stimulating consumer activists and opportunistic politicians to attempt similar actions in at least 20 other states. These happenings are further reinforcing our reputation as an industry that has poor relations with the public.

In recent years, our image has also been tarnished by unacceptable volatility in the commercial lines market, a situation aggravated by wide interest rate fluctuations and high liability losses caused, in part, by a changing tort liability system. The result has been a flight by some of our commercial lines customers from traditional insurance to other methods of handling risk. Some observers feel we will never get many of these customers back.

The major problem for insurers at the present time is unquestionably the spreading public discontent with auto insurance rates. One can begin to understand why by looking at the national averages. Over the past five years, the average cost of auto insurance has risen almost 60 percent, more than three times that of the Consumer Price Index. In urban areas, this cost escalation has been even more pronounced. The end result has been quite predictable: public anger and a growing perception that insurers are somehow "ripping them off."

Within the insurance industry, we know only too well that escalating auto insurance costs are not the result of insurer greed, but rather of the cost of those things that insurance pays for. The cost of various medical care items are up significantly more than auto insurance rates. Competition in the crash parts business has slowed down auto repair cost increases somewhat, but even so, the latest study by the Alliance of American Insurers shows that replacement parts to rebuild a $13,000 car would cost more than $40,000--and that does not include labor.

The problem is even greater in congested urban areas where auto accident claims and suits have increased significantly and where the inflationary trends in auto repair costs and medical care expenses have climbed even faster than elsewhere. …

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