A second way to reduce average

A second way to reduce average premiums may be to place restrictions on lawsuits for noneconomic
damages, through the adoption of a no-fault insurance system. No-fault states tend to
have the highest average premiums, followed by add-on and tort states. However, very few states
have adopted a no-fault system that puts real restrictions on liability lawsuits. In addition, there are
many differences between states, such as minimum coverages (dollar amounts) required, how
risky drivers are handled (assigned risk plans), and other state policies (such as drunk driving
laws, the legal drinking age, and speed limits) which confound an analysis of what effect the state
claim system has on average premiums. A true comparison of alternative systems would require
estimating the average premium in a given state if it adopted a different insurance system. Such an analysis, performed by RAND, indicates that the effect of a traditional tort state switching to a nofault
system could range from a 13 percent increase to a 52 percent decrease in the average
premium, depending on the level of benefits and the type of threshold adopted.
Some critics of PAYD have argued that annual miles driven, or its proxy gallons of gasoline
consumed, are not good predictors of the likelihood a driver will be involved in an accident.
Several studies suggest otherwise; in particular, one recent California study indicates that location,
miles driven and driving record are the best predictors of accident frequency and severity. Other
critics are concerned that a PAYD system would reduce auto safety, by lowering insurance costs
for teenagers, and thereby encouraging them to drive more (teens are recognized as one of the
riskiest classes of drivers). This would only pose a problem if most teens are not currently
driving. However, it is likely that many, if not most, teens are currently driving, possibly either
uninsured or on their parents’ policy. A properly designed PAYD system, which would increase
the per-gallon costs of driving, may in fact act to discourage teen driving.
Many researchers have studied the impact of changes of fuel price on. driving behavior, and thus
fuel consumption and C02 emissions. However, none have explicitly analyzed the effect of
transfering a portion of fixed insurance costs to variable charges. Existing studies can give some
insight into the effect various PAYD systems may have on fuel use and C02 emissions, but a
detailed analysis of PAYD is needed (the California Energy Commission currently is analyzing this issue).
Several studies have documented the effect of gasoline taxes on various segments of the
population. In general, households with higher incomes, of non-Caucasian ethnicity, located in the
south and west, or located in suburbs and rural areas, purchase more gasoline, and therefore
would likely be more affected by a PAYD system. A recent study demonstrates that certain
households have a greater ability to mitigate the impact of changes in fuel price in the short term by
shifting their travel to a second, more fuel efficient vehicle. The only study of the impact of a
specific California PAYD proposal (the Uninsured Motorist Act, or UMA) on low-income
households concluded that UMA would benefit low-income drivers, who currently pay much
higher premiums than other drivers. Low-income advocacy groups supported UMA in hearings
before the California legislature. A simple comparison of national gasoline and mandatory
insurance expenditures of different income groups indicates that UMA would shift mandatory
insurance expenditures from the poorest households to other households.
It is possible to adjust several features of a particular PAYD system to address local concerns. For
example, a system proposed in California2 would collect about half of insurance revenue from
several annual registration fees.