Impact on Insurance Provision

Impact on Insurance Provision
Reform of state insurance systems has fueled much of the state-level interest in PAYD to date. In
this section we examine how PAYD systems would impact the provision of insurance. We first
provide some background on the different insurance systems the states currently have in place, and
describe the types of insurance coverage provided under each system. Next, we summarize five
PAYD systems that have been proposed in California recently, as well as proposals made in other
states. We then present data on the current costs of insurance by state, and look at how PAYD
systems might reduce average insurance premiums. Finally, we examine two concerns that critics
of PAYD have raised: 1) is annual miles driven, or its proxy, gallons of gasoline consumed, a
reliable predictor of accident. frequency/severity? and 2) will PAYD reduce overall automotive
safety by encouraging teenagers, who tend to be the riskiest drivers, to drive more?
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2.1. Background on Insurance Issues
Automotive insurance reform has long been an issue in many states. In most states, medical costs
and property damages are paid by the insurance company that covers the driver who is judged to be
at fault in an accident. Typically, these systems allow victims to sue to recover damages for “pain
and suffering”, or “non-economic losses”, which are in addition to compensation for any property
damage, hospitalization, and health care costs. Insurance companies recover any non-economic
damages they pay out by raising insurance premiums on all drivers that they cover. For years
critics of auto insurance have proposed limiting liability damages as a means of reducing insurance
premiums. These proposals generally consisted of replacing current systems with no-fault
insurance systems; under no-fault, injured drivers are covered by their own insurance company,
rather than the company of the at-fault driver. Although several states have adopted variations of
no-fault auto insurance, currently none of these systems cap the amount of damages victims can
sue for.