What’s the Right Price for Direct Auto Insurance?

Making Sure All Drivers Can Buy Direct Auto Insurance

With regard to consumers, the question is what effect does a large or small involuntary market have on availability of direct auto insurance. The answer to this question really depends upon what one means by availability.

If availability is divorced from affordability and considered simply as a question of whether there is direct auto insurance available to the drivers in a given area, the evidence strongly suggests that for the lion’s share of drivers insurance is available in the voluntary market wherever insurers are not precluded from entering this market by government controls that prevent them from charging prices commensurate with risk. In any given state a certain percentage of drivers will represent non-standard risks.

There is no evidence that the free market, if not impeded, fails to offer insurance to these drivers. In Texas, for example, 17 percent of drivers obtain insurance in the non-standard market; in Wyoming, 19 percent; in Utah, 10 percent. These and a number of other states have infinitesimal numbers of drivers insured in the involuntary market. In other words, for all but an infinitesimal number of drivers, the private enterprise system is effective at making insurance available, on a competitive basis, at a price that reflects risk.

When the word “availability” is defined to mean “available at an affordable price,” then the issue is not availability, but affordability, which has already been discussed.

If “available” is defined to mean having the same amount and types of coverage available in the voluntary and involuntary market, then, clearly, in a number of states, insurance is not as available in the involuntary market as it is in the voluntary market. Some groups have charged that the involuntary market system is unfair from the point of view of drivers who must purchase their insurance there, because they cannot get the same coverage as in the voluntary market and because applicants have no choice of insurers and coverages. It has also been charged that the involuntary market is a device to permit redlining. Redlining refers to the notion that insurance companies refuse to write direct auto insurance in certain geographical areas. Such a practice is forbidden by the laws of all 50 states.

The involuntary market exists to ensure that at least basic insurance is available to drivers unable to obtain insurance in the voluntary market. However, there is no inherent reason why all the coverage available in the voluntary market cannot also be made available in the involuntary market. The only issue is how it will be paid for. If states provide a way for individual high risk drivers to finance the purchase of more coverage or a workable way for insurers to subsidize greater coverage, broader coverage then could be made available in the involuntary market. The reason it is not is that, for the most part, states have been unable to find an acceptable way to finance such direct auto insurance coverage.

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