Academic journal article Journal of Risk and Insurance

Determinants of No-Fault Insurance Measures

Academic journal article Journal of Risk and Insurance

Determinants of No-Fault Insurance Measures

Article excerpt

ABSTRACT

In spite of being touted as the panacea for rising premiums and unfair settlements, no-fault automobile insurance provisions exist in fewer than one third of U.S. states. Few researchers have examined why such measures exist in some states but not in others. This article focuses directly on this issue by looking at the factors that help explain the type of no-fault regime in place. The article conducts an empirical analysis using a data set that spans all 50 states over the 19-year period from 1972 to 1990. Among other things, the analysis finds that the structure of the insurance industry and the type of rate regulation under which it operates are determinants of these decisions.

INTRODUCTION

Few issues in the area of insurance provision have spurred as much academic debate and political fervor as has the choice of legal regime. In spite of being touted as the panacea for rising premiums and unfair settlements, no-fault automobile insurance provisions have been implemented in fewer than one third of the states in the United States. (1) Since 1972, 16 states have switched from a liability-based regime to a partial no-fault one, (2) three have repealed this decision (Nevada in 1980, Pennsylvania in 1984, and Georgia in 1990), and, more recently, two states introduced optional no-fault provisions (New Jersey in 1989 and Pennsylvania in 1990). (3) In Canada, four provinces have implemented no-fault automobile insurance: Quebec in 1978, Ontario in 1990, and Manitoba and Saskatchewan in 1994, and one has reverted to a liability-based regime (Ontario in 1996).

One measure of the contentiousness of the liability/no-fault choice for automobile insurance is the number of studies that it has provoked. Starting from Keeton and O'Connell's (1965) groundbreaking work, researchers have set forth the various issues and have attempted to quantify the relative merits of each regime. (4) The empirical work in this area has tended to focus on the so-called deterrence-versus-compensation debate, addressing the question of whether no-fault insurance actually leads to an increase in motor vehicle accidents. On this front the debate has been lively: Some have found that the legal regime does influence driving behavior (e.g., Cummins and Weiss, 1999; Cummins et al., 1999; Devlin, 1992, 1999; Landes, 1982; McEwin, 1989), while others have found that it does not (Kochanowski and Young, 1985; Zador and Lund, 1986). In fairness, however, one should note that, aside from Landes' work, which has been severely criticized on methodological grounds, the results of these other articles may be somewhat reconciled when one takes into account the strength of the no-fault regime. Generally speaking, the higher the tort threshold, the more likely that the no-fault regime will result in an increase in accidents when compared to a liability-based one (Devlin, 1999). (5) The ability of no-fault insurance to influence costs and compensation levels has also been extensively treated by researchers. (6)

Despite the fact that the economic consequences of no-fault automobile insurance have received a fair degree of attention, the literature has largely ignored the question of why some jurisdictions switched from a liability regime to a no-fault one while others have not. (7) If no-fault insurance actually leads to reduced administrative costs and fairer settlements without affecting accidents, why have all states not enacted these provisions? Similarly, if no-fault has not held up to these promises, why does it still persist in 15 states (8) and continue to be chosen by policymakers? To shed some light on these questions, this article examines the factors that influence the switch to no-fault insurance and the type of no-fault regime chosen.

The article is empirical in nature and hence is naturally biased toward factors that are somewhat quantifiable. It takes advantage of the rich heterogeneity existing across 50 U. …

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