Commentary : No ‘Quick Fix’ for Insurance Cost

People everywhere are asking how to reduce insurance costs. Many choose to measure insurance costs in terms of what they pay in premiums rather than what it costs to pay for the insurance claims of large groups of people and businesses. To do so invites misdiagnosis of some very real problems, not only within the insurance world but in society in general.

A recent study released by Santa Ana-based Western Insurance Information Service showed that motor vehicle thefts in Orange County increased 25% during the past year, with an average of 675 thefts per 100,000 people. While a 25% increase is shocking, Orange County still ranks below Los Angeles County in vehicle theft, which topped the list with a record 1,257 vehicle thefts per 100,000 people.

The service also recently released a study that measured the number of lawsuits filed following auto accidents. Orange County lawsuits increased 15% over the prior year, with an average of 410 lawsuits being filed for every 100,000 people. We now rank as the second most litigious county in the state, behind only Los Angeles.

Not only have the numbers of lawsuits and thefts increased, but we’ve seen drastic increases in the costs of goods and services over the years. According to the consumer price index, the cost of medical care has increased 133% during the past 10 years, doctors’ fees 127%, hospital rooms 177%, auto repair 91%. Insurance premiums, following right behind these goods and services for which insurance must pay, increased an average of 133% during the past 10 years.

Our private insurance system is being called upon to pay for all of this bad news--whether it be increased auto theft, lawsuits or the cost of fixing cars and mending people. It also, through the uninsured motorist coverage that many choose to purchase, must pay for the damage done by those who refuse to be financially responsible for the damage they do to others and their property. In reality, this money comes from the millions of policyholders who have pooled their insurance premiums in exchange for protection against a possible financial catastrophe. The insurance company is merely the mechanism for pooling that risk and guaranteeing payment of the claims.

By its very nature, insurance has been dubbed the messenger of what is going on in our civil justice system, our economy and in society in general. Insurance pricing basically is a reflection of what is going on in our social environment. And, as the cost of the goods and services for which insurance pays continues to rise, so must insurance premiums to guarantee that money will be available to pay all obligations.

In 1988, we can expect to see activity in the Legislature and through the initiative process claiming to “do something” about the high cost of insurance. If the proposals sound too good to be true, they probably are. Ask why.

One popular “solution” to the high cost of auto insurance that has been proposed is the elimination of geographical location--basing premiums in part on where a person lives. Studies have shown that if this is done, two-thirds of the drivers in California, including those in Orange County, would pay more for their insurance, so that one-third of the state’s drivers (mainly those in Los Angeles and San Francisco) could pay less! That’s not bringing down the cost of auto insurance. That’s redistributing the costs to other areas that are currently paying less.

It’s a fact that the amount of auto theft, vandalism and litigation varies from area to area. So do medical costs, wages and motor vehicle repair costs. Some of our cities have proven to be riskier and more costly areas in which to insure cars than others. Therefore, insurance is going to cost more in these areas than in others--and well it should!

Any true solution to the rising cost of auto insurance must address the amount of dollars paid out by companies.

Motorists can practice better loss control, which could be as simple as locking the car door and taking the key. They can also support stronger law enforcement, more judicious use of our court system and health care services, and legislative and initiative measures that address the numbers of dollars flowing out of the system instead of “quick fix” solutions that merely redistribute the burden to other groups.

One such example is the recently proposed “no-fault” solution. Under a no-fault system, each driver’s insurance company pays for that driver’s injuries, regardless of who was at fault in the accident. Since the question of fault is eliminated in most cases, such a system eliminates the need for most court actions, thereby reducing insurance claim costs and years of court delays. The savings would ultimately be reflected in our premiums.

Be wary of proposals that attempt to “shoot the messenger” and seek restrictive regulations that would hamper one of the most competitive industries. Shooting the messenger will deprive us all of an efficient system that makes people whole, compensates those wrongfully injured and protects people and businesses from catastrophic loss.