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is intended automatically to pay prescribed "benefits” to every ill or injured person covered, regardless of fault.
But the tort liability system and the insurance system funding it were never intended as a mechanism for automatically disbursing prescribed “benefits" to every injured person indiscriminately. It therefore cannot be fairly measured or evaluated in terms of the relationship of net “benefits paid" to third party claimants versus insurance premium dollars collected.
The purpose of the tort liability system is to (1) determine whether on the basis of absence or presence of fault an injured person should bear his own losses (directly or out of some form of first-party insurance) or should be entitled to look to a third party for reparation of those losses, and (2) if a right of reparation exists, to determine the amount of such reparation. The purpose of the liability insurance system is to provide, on behalf of such third party, (1) essential investigatory and legal services attendant to the making of each of the foregoing determinations, and (2) funds for the payment of such reparations as are determined to be owing to the injured person. The sum of these two items constitutes the "benefits" received by the premium-paying public under the automobile liability insurance system, as viewed in the context of today's legal system. Expressed in these terms, the automobile insurance business over the past 10 years has been delivering in the aggregate roughly 75¢ in “benefits" for each dollar of liability insurance premiums.*
It would be a most serious error to infer, from the alleged comparison of "administrative expenses” and “benefits paid" for automobile liability, workmen's compensation and group accident and health insurance on the November 24 staff chart, that by converting the automobile liability system to a no-fault system, the "administrative expenses" for automobile insurance could or would thereby be reduced to those shown for the latter two lines. A major factor underlying the differences that now exist between company administrative expenses in the three lines mentioned is acquisition cost, i.e., selling expenses. Best's Aggregates and Averages 1969 shows these pronounced differences in the 10-year (1959–1968) cumulative average ratios of commissions and brokerage to premiums written by casualty insurers for the three lines.
It is sometimes suggested or assumed that adoption of a no-fault system for automobile liability insurance would either immediately or inevitably bring about the insuring of a substantial majority of today's private passenger cars under "group" policies, and that substantial acquisition expense savings would thereby accrue. Support for a move to no-fault on the basis of these assumptions would be a serious mistake.
As indicated more fully in a memorandum filed by this Association with the Federal Trade Commission in December 1969, copies of which are being supplied to this Subcommittee, while a switch to a no-fault system for auto insurance
a For 1968 (the last year in which figures are available) the Auto BI liability ratio of losses and loss adjustment expense incurred to premiums earned for stock companies was 75.9% (underwriting expense ratio to premiums written was 28.0%). The ratio of losses and loss adjustment expense incurred to premiums earned for Auto PD was 76.7 % (underwriting expense ratio to premiums written was 28.7%.) The Mutual company experience for the same year for auto BI liability was 78.5% (the underwriting expense ratio was 22.5%). For Auto PD, the ratios were 83.9% and 22.5%. For the 10 year period 1959-1968, the ratios were as follows:
might in some ways tend to accelerate the spread of group auto, there are many other factors which would present obstacles or deterrents to that spread. Even assuming those obstacles were overcome, it is our estimate that not more than about 25% of those who need auto insurance could be handled through a group technique.
In this connection it is pertinent to look at acquisition expense ratios for accident and health coverage other than group. The 10-year (1959-1968) cumulative average ratio of commissions and brokerage to premiums written, as shown by Best's A&A for that line, was 23.6% for stocks and 17.9% for mutuals. If accident and health insurance expense ratios are to be used as a bellwether of what can be anticipated under a no-fault automobile accident reparations system, as some advocates of that move would suggest or imply, it would follow that the huge segment of the motoring public who never qualify for group policies may anticipate increases in the acquisition expense portion of their premiums ranging from almost 45% to more than 100%.22
Best's also reveals that during the same 10 year period, the stock companies incurred in losses 23 only about 5142¢ per dollar of premiums earned on nongroup A&H coverage, as against more than 74¢ in losses per dollar of premium on BI liability coverage and 72%2¢ on PD. (For mutuals, the corresponding figures were 6642€ for non-group A&H, 77.8¢ for auto BI and 77.1¢ for PD.) Thus, even when viewed solely from the standpoint of net pay-out in claims and direct claim costs, the auto liability system has been returning a bigger share of the premium dollar to the public than has the non-group A&H system.
Insofar as group A&H is concerned, it is interesting to note that during the past 10 years (1959–1968) the average commission-brokerage expense ratios incurred by all stock companies for that line increased 100%, while the corresponding ratio for automobile BI went down 14% and that for automobile PD went doron 16%. As of 1968 they were less than 5 percentage points apart—15.2% for auto BI and 15.5% for PD: 10.8% for group A&H.24 These trends for an important segment of the business greatly weaken any promise of substantial acquisition cost savings by adoption of a no-fault system, even in the case of that minority of motorists who might ultimately be written on a group basis.
It is significant in this connection that when the American Insurance Association made cost projections under its proposed no-fault auto compensation plan (to be discussed below) its actuaries did not assume that there would be any reduction in the "production cost" portion of the premium dollar from its present level under the auto liability system. The membership of that Association's Special Study Committee which prepared the report proposing their new plan contains some of the largest writers of A&H insurance, both group and non-group, in the country.
The chart captioned "Comparison of Private Insurance Systems—Cost of Delivering $100 of Benefits" placed in the hearing record by your Subcommittee on November 24 was accompanied by a chart captioned "Where Your Insurance Premiums Went-10 Year Totals, 1959-1968," also prepared by the Subcommittee staff. We have asked Mr. Sharp of the staff for particulars as to how the figures therein shown were derived. While we must await that information before we can comment specifically on those figures, we again submit that even were one to accept the figures at face value, the chart is of very limited significance in respect to the merits of the fault vs. no-fault controversy. The biggest cost item shown is of course agents' commissions and other selling expenses, allegedly totalling 20% of the premium dollar. We have already noted that if present non-group A&H acquisition expense ratios are any bellwether, a majority of motorists may anticipate an increase in this item, and, that judging from recent trends on group A&H acquisition expenses, for an important segment of the business, the prospect of significant savings in that area for the rest of the motoring public may prove empty.
As noted, the architects of the American Insurance Association no-fault plan have not predicted any insurance premium cost reduction in the area of selling expenses. Instead, they have rested their hope for cost savings upon the elimination of all right of injured parties to recover from any source their general (non-pecuniary) damages, (2) the elimination of all right of car-owners to recover property losses from a third party who wrongfully damages or destroys their car, and (3) an anticipated reduction in loss adjustment expenses. They have predicted that the dollars saved from these sources will balance the added dollars that must be paid under their plan to claimants presently barred by the fault principle, and that substantial overall premium earnings will result.
2 The amount by which the 10-year averages of those non-group A&H commissionbrokerage ratios exceeded the 10-year ratios for auto BI and PD, for stock companies and mutual companies, respectively.
2 Including adjustment expense.
For mutuals, the average commission-brokerage ratio for the same period went down about 15 % but so did auto BI by 2% and auto PD by about the same percent. It should also be mentioned that the mutual share of the business is small representing only about 50 % of the total Group business written by Stock insurance companies. Source : Best's Aggregates and Averages, 1969.
It is our considered opinion, based on careful review of the AIA plan and a cost study by actuaries from the American Mutual Insurance Alliance which has been confirmed by our own actuaries that these predictions are unfounded and unattainable.
In the first place, the AIA used a presumed level of "fully adequate rates” as its base for projecting the promised savings. Yet, the national rating bureau serving most of its companies considers rates in many states today to be at least 10% to 15% inadequate, which would substantially reduce or nullify the proposed "savings" in those areas even under the AIA's own projections.
Even when computed from "fully adequate rate levels”, the promised rate reductions are in our actuaries' opinion illusory. The American Mutual Insurance Alliance concluded after careful actuarial study that the AIA plan would increase the cost of bodily injury coverage by at least 20% instead of reducing it by 25% as suggested by AIA. This in turn reduces and in some cases eliminates the overall savings which AIA projected for various combinations of coverages and policy limits. Our actuaries not only agree with the AMIA critique, but they also question the appropriateness of some of the data used in the AIA study underlying its cost figures.
All things considered, we are firmly convinced that the AIA proposals or any counterpart no-fault compensation plan will inevitably result in increased rates for most motorists.
The other reasons why we cannot in good conscience support any such plan or recommended it to this Subcommittee or to any legislature include the following:
It would eliminate personal accountability for negligent conduct on the highways, at a time when every bit of motivation for careful conduct and accident prevention is needed.
It would deprive innocent accident victims of all right of recovery for "general damages", such as pain, suffering, mental anguish, and the lifetime consequences (other than a limited work-loss allowance) of disfigurement, dismemberment, bodily impairment, or loss of earning capacity or potential.
It would shift a substantial share of the loss burden from those who cause the most accidents to those who cause the fewest. Thus, it would benefit the young, single hot-rodder and penalize the responsible, careful father of a large family.
It would force every motorist who does not elect to carry collision insurance to pay out of his pocket the entire cost of repairing or replacing his car when damaged by the wrongful act of another, or if he carries deductible
collision, to pay the deductible out of his pocket. Additional problems and deficiencies inherent in such a plan are described in the attached Report of the Defense Research Institute entitled "An Analysis and Critique of An Automobile Insurance Proposal ...", and in the December 1969 memorandum of NAII to the Federal Trade Commission on "Price and Availability in the Market for Automobile Insurance-Fault vs. Non-fault Compensation Schemes" which is being supplied to this Subcommittee.
Both because of the vital rights which any such no-fault plan would take away from injured persons and from owners of damaged cars, and because of the rate increases it would force on a substantial segment of responsible citizens, we submit that its adoption would produce public repercussions which would make today's expressions of discontent seem mild by comparison. We strongly recommend against any such move.
WHERE WE STAND
Our unwillingness to endorse drastic "no responsibility” plans does not mean that we consider the existing system completely satisfactory or that we are opposed to change. We welcome and thrive on change, provided it is based on careful study, testing and experimentation.
Great strides have already been made in recent years in improving the operations of the insurance reparation function, and our companies have been in the forefront of this progress.
One landmark step has been the inauguration of the advance payment system, under which the liability insurer of the party presumably at fault voluntarily commences immediately after the accident to pay the medical, disability, rehabilitation and all other kindred expenses reasonably incurred or needed by the injured third party, without any final release of liability being taken. Such programs were first instituted by most major insurers in the period 1964-1967 and their use has become more widespread each ensuing year.
A comprehensive monograph "Advance Payments In Liability Claims" presented by Messrs. Charles Buchheit, Jerry Young and John Kurtoch to the Society of Chartered Property and Casualty Underwriters in October 1968 indicates that this system is being employed in an increasing percentage of cases, and that it is working to greatly improve claimant satisfaction as well as to reduce litigation and produce savings for claimants and insurers alike. Among the insurers surveyed, one company reported that it was offering advance payments on 2000 claims per month; another reported that it was paying out over $1,300,000 per month in advance payments. We would estimate that in the aggregate, hundreds of thousands of claimants annually are now being offered the benefits of this technique.
Examples of the way the advance payment system actually operates are set forth in the attached list of 20 typical cases excerpted from pp. 14–17 of the Buchheit-Young-Kurtoch monograph. These cases, such as the instances of a liability insurer advancing over $72,000 to an injured party, may serve to demonstrate the "new look" in liability claims handling which all too often goes unnoticed by critics of our business.
Another notable step in the same direction was the adoption a year ago by our Association of a voluntary code of Guiding Principles Relating to Automobile Insurance Claims, calling among other things for immediate, objective consideration of every claim, for fair determination of amount due, for prompt conclusion of each claim on its merits, for assistance in rehabilitation where indicated, and for payment of meritorious property damage claims without requiring simultaneous settlement of bodily injury claims. A copy of those Guiding Principles has already been filed with your Subcommittee as an attachment to our Statement presented on October 8, 1969 in the automobile repair phase of your hearings.
Another good example of voluntary innovation within our industry and our Association was the introduction early this year by Preferred Risk Mutual Insurance Company of Des Moines, an NAII member, of their new "Auto-Matic Pay" coverage which provides the insured and guests with automobile accident medical and economic loss benefits (with basic limits of $10,000 and optional higher limits) payable regardless of fault. This coverage has been added to some 200,000 policies in 26 states on a "right-to-reject" basis, at a moderate premium cost, and the incidence of rejections has been negligible. Other companies are watching this experiment with interest, and several have already announced plans to initiate comparable programs.
Valuable research has also been conducted by the American Mutual Insurance Alliance under their Guaranteed Benefits Experiment, in which several of our member companies have participated. Reports on that project have already been submitted to this Subcommittee by the AMIA.
In these and other ways those in our industry who believe in evolutionary reform rather than revolutionary disruption and abandonment of the faultliability system are working diligently to improve the system. We believe that each step in that process must be bottomed on sound research, testing and experimentation—not on mere theory and conjecture. In this connection we await with interest the research data we know will be forthcoming from the pending Department of Transportation study of the automobile damage reparations process, in which the NAII and many of its companies individually are cooperating. We believe it would be premature for us to arrive at final conclusions as to what if any major changes should be made in the automobile accident reparations systemis of the various states without having the benefit of that considerable additional data.
In the meantime, however, we do not believe that other ideas should be forgotten. We have indicated our continued willingness to cooperate with the Defense Research Institute in its research on general damages and the various suggestions for more objective measures for such damages. In addition, we are also closely examining the uniform personal injury code suggested in a recent speech by Mr. Perry Fuller, a Chicago Defense Attorney. This latter idea would codify all statutory causes of action into one uniform provision and prevent the overlapping and delay which now occurs where an injury is within more than one of these statutes.
Where a need for improvement or reform has been clearly manifested by the legislators or officials of any state, our Association and companies have been ready and willing to cooperate in working toward suitable solutions. For example, early this year in Connecticut, we supported in basic concept the reparations system reform program proposed by Insurance Commissioner Cotter.
That Plan would, among other things, make first-party no-fault benefits of up to $2,000 medical and up to 52 weeks of disability a mandatory part of every auto policy written. Recipients of these benefits would be required to help produce an overall premium saving, the Plan calls for a 15% reduction to deduct them from any recoveries they may seek in tort.
To offset the added costs this broadened coverage would entail, and hopefully to help produce an overall premium saving, the Plan calls for a 15% reduction in tort liability damages for wage loss-to recognize the fact that income taxes aren't paid in damage awards. It also calls for arbitration of small claims, for regulation of contingent fees, and for reasonable limitations on tort liability awards for pain and suffering in the less serious cases, i.e., those not involving death, disfigurement, dismemberment, premanent bodily impairment or certain other special situations.
In supporting the Cotter Plan in Connecticut, we did not suggest that the combination of measures in that package is the final answer, or the perfect answer, or that every other jurisdiction should forthwith adopt it. We supported it as a constructive, middle-of-the-road approach that seemed to be responsive to many of the prime areas of concern in that state, and around which we had hoped the various segments of the business might effect a reasonable compromise of their differing viewpoints.
While the Cotter Plan does incorporate limited amounts of first-party coverages payable regardless of fault there are these major differences among others between it and drastic “no-fault" plans of the type proposed by the American Insurance Association.
(1) It preserves the principle of personal accountability for negligence on the highways;
(2) It preserves the right to sue a wrongdoer and to have a jury trial in all cases of any financial consequence;
(3) It preserves the right of recovery for pain and suffering without limit in the serious cases, but subject to seemingly reasonable limits in minor cases;
(4) It does not shift loss or premium burdens from those who cause the most accidents to those who cause the least;
(5) It does not pose significant problems of coordination vis a vis the nonauto liability system within the state or the auto liability systems of other states;
(6) It is evolutionary and does not constitute an irretraceable step.
We feel that in many of the Cotter Plan's basic concepts, it represents the best-balanced approach offered in any state thus far.
Your Subcommittee invited comments upon the questions relating to (1) availability of automobile insurance, and (2) the automobile accident reparations system and, we have directed our comments specifically to those questions. Improvement of the systems and processes by which insurance is distributed and losses are compensated is indeed an extremely important goal. However, we wish to point out that in our opinion, it will never be possible to make the entire public happy simply by restructuring the existing rules for determining who gets paid how much and in what automobile accident situation. Nor will it be possible to make them all happy by restructuring existing methods of spreading the cost of those loss payment among different classes of motorists.
Changes in either of these areas may help placate some people who now voice complaints. However, if the benefits or advantages given to that newly favored group are given at the expense or detriment of another group, overall public dissatisfaction will not be abated. It will simply be transferred, and probably amplified in the process. 25
25 See in this connection our memorandum of December 1969 to the FTC hereinabove referred to.