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Public Policy Analysis & Opinion

The uninsured auto problem

NAIC abrogates responsibility to motor vehicle agencies

By Kevin P. Hennosy

On September 21, 2006, it was raining in Kansas City. I was driving across town when the car ahead of me stopped to make a left hand turn onto a side street. I stopped and waited for the traffic to clear so that the car ahead of me could make the turn.

As I talked to a friend of mine on the speakerphone, I looked into my rearview mirror and saw a car moving toward me at a relatively high rate of speed. I did not think the car would be able to stop in time, and then I saw the front of the car rotate slowly to my left. I said to my friend, “I am about to get hit.” Then I felt my car lurch forward and heard a low crunch.

After reporting to my friend that I did not believe I was hurt, I looked back at the driver who hit me. I exited my car and saw that both cars had suffered damage that was likely to be expensive. The car that struck mine was what Joe Friday might have referred to as a “late model Saab” (if Joe Friday ever saw a Saab).

I walked up to the driver’s window and asked the woman if she was all right. She said she was although from the look on her face I think her pride was suffering. So then I asked the next most important question: Do you have insurance?

I was lucky; she did have insurance. In fact, we both did business with the same company. We both contacted the agents we do business with and had started the claims process before the police arrived.

Of course I was relieved that the driver who hit me had insurance, but in the moments immediately following the accident I did not assume she would. The number of uninsured motorists on America’s roads, streets and highways is a dirty little secret.

The “secret-uninsured” result in the concentration of risk in the insured population to the detriment of the public interest. The secret-uninsured mask market weaknesses and leave insurers open to charges of unfair discrimination. The secret-uninsured result in cost shifting when medical expenses incurred in auto accidents go unpaid. The secret-uninsured also result in the loss of premium taxes that could bolster flagging state revenues.

One would think that a situation that results in so many problems would have the attention of public officials, industry trade associations and consumer groups. Think again. Just getting accurate and complete data to document the extent of the problem is difficult. What data are available can be misleading.

Take a look at the situation in Missouri as an example. I feature Missouri only because it is my home state. The problems in the Show Me State are not unique.

According to a 2005 report by Missouri State Auditor Claire McCaskill, most financial responsibility data reported to the Missouri Department of Revenue was seriously flawed.

The auditor’s report said:
Department staff obtains data from insurance companies to evaluate vehicle owners’ insurance status. But auditors found this data is not always accurate and the mistakes unnecessarily cause vehicles to be dropped from the monitoring system. Auditors found some of these data mistakes could easily be resolved. Improved accuracy could increase the number of uninsured motorists monitored by the state.

In addition, the Missouri Auditor’s report faults the exclusion of commercial fleets from the compulsory auto insurance report. Commercial insurance advocates sometimes argue that this is a desirable policy because the rapid turnover that most fleets experience makes matching insurance status against vehicle registrations a nightmare. Of course this also allows commercial fleet operators to effectively self-insure for vehicle accidents, which can easily be accounted for with a check noted as “vehicle repairs.” Still, the auditor’s report points out that in Missouri, this exclusion removes 1.1 million vehicles of 5 million registered vehicles from insurance reporting.

With regard to the 3.9 million vehicles subject to reporting in Missouri, compliance is not accurately measured. Data submitted by insurance companies are infamously corrupted; insurance regulators have struggled with this situation for decades. With the help of the National Association of Insurance Commissioners (NAIC), insurance regulators submit insurers’ financial and investment data to a strict regimen of cross-checks aimed at cleaning up data submissions. Compulsory automobile data do not benefit from a similar system.

The Missouri experience once again proves informative. The state established a compulsory auto insurance law in 1987. The legislature created a database under the Department of Revenue to aid in tracking compliance with the law in 1999, but did not provide full funding for operations. The next year, rather than fully funding the database program, the legislature granted the Department of Revenue statutory authority to use a sampling system to test data quality.

The sampling program draws about 32,000 records from the 3.9 million records filed with the Department of Revenue by insurers on a monthly basis. The test consists of a letter sent to about 300 potential uninsured motorists every day, which asks the addressees whether they have auto insurance. The letter simply asks the addressees to answer yes or no and to sign the response form. The letter does not request supporting documentation, such as a copy of the vehicle owners’ proof of insurance card.

I can attest to the fact that using the Missouri registration and insurance database is dicey at best. The state uses the same database for the purpose of renewing license tags online. I have tried to use the online system twice and was stymied both times. One time, the state had an inaccurate Vehicle Identification Number that it received from the insurance database, which I then corrected with my insurance company. The next year, the policy number for another vehicle I own was corrupted in the state database, which the state and the insurance company decided was somehow the fault of the Department of Insurance.

In either case, the inaccurate records should have led to my receiving a follow-up letter from the Department of Revenue, and I never did. Neither of my car records ever ended up in a random sample. I guess I am just a lucky guy. Luck seems to be a very odd element to add to a statutory compliance function.

The Missouri auditor’s report found that those who are unlucky enough to receive a query letter from the Department of Revenue are not always honest in their response. The report documents about 12% of respondents to query letters who claimed to have insurance, but further investigation proved that they did not.

In Missouri and other states, the result of this haphazard system is that state officials do not really have a handle on how many uninsured motorists drive in their jurisdiction. In most jurisdictions even conservative estimates are that from 10% to 25% of the population drives without insurance.

Compulsory insurance laws were designed to spread the risk of financial loss resulting from vehicle accidents across the entire driving population. In addition to using flawed data generated from car licensing, states rely on police to enforce compulsory insurance laws. Because police have better things to do than stop drivers to ask for up-to-date insurance cards, this is not an optimum approach to enforcement. When states simply ignore 10%, 25% or some larger percent of the population, it undermines the mechanism and concentrates the risk of loss.

The weight of that loss registers in higher rates for those who do purchase insurance coverage. But it does more than that. For example, hospital costs increase to cover working poor patients injured in auto accidents who have neither health nor auto insurance and do not qualify for Medicaid coverage. Insured patients and the taxpayers end up paying these costs today.

The state tax coffers also lose tens of millions of dollars a year in potential premium tax revenue. In most states, revenue from the insurance premium tax is applied to the general fund. It is also true that in most states the largest expenditure from the general fund is primary and secondary education, so it is not too far of a stretch to say that the uninsured motorist problem harms school funding in many jurisdictions.

For multiple reasons, we do not really know how many motorists drive without insurance; however, the problem deserves the attention of policymakers and insurance professionals. In my opinion, public officials and professionals alike tend to ignore the problem of uninsured motorists because it is seen as a failure on several levels: 1) a failure of the law, 2) a failure of enforcement, 3) a failure of regulation, 4) a failure of administration, 5) a failure of markets. In an effort to avoid association with failure, officials and managers tend to ignore it or even cover it up.

At the fall national meeting of the NAIC, the chair of a working group charged with uninsured motorist issues, South Carolina Commissioner Eleanor Kitsman, wondered aloud whether the number of uninsured motorists is even a regulatory concern. One can assume that the commissioner’s inquiry responds to the fact that most states cede responsibility for maintaining insured motorist data to motor vehicle departments. Nevertheless, I believe the issue rests firmly in the portfolio of insurance regulators.

For the past 10 years, those of us who monitor insurance regulation have heard a lot of talk about the need to let markets regulate insurance. While I will still argue that this approach is contrary to the intent of the McCarran-Ferguson Act, which exempts insurance from antitrust to the extent that the states regulate the business, a market-based system seems to beg for oversight of markets.

In order to foster and maintain healthy insurance markets, state regulators should understand the extent, location and motivation of uninsured drivers. When regulators or advocates simply assume that one demographic group or another simply chooses not to participate in the market, they are kidding themselves and shirking their responsibility.

Consumer advocates are generally cool to enforcement of compulsory insurance laws because they assume that such activity simply punishes the poor for being poor. These concerns should not be discounted. Not every uninsured motorist is a person who has decided to reject financial responsibility. It is important that policymakers examine the availability and affordability issues that can undermine markets.

Understanding the uninsured problem will not come from anecdotal evidence, well-meaning stories or hard-hearted assumptions. Officials need complete and valid data sets and national benchmarks. As noted above, state officials have proved unable to adopt standard methods and protocols for collecting, storing and analyzing market data related to uninsured motorists.

Historically, states have banded together to address such problems through the NAIC—although, Congressional hearings generally have sped up the process. Yet, the NAIC has been slow to accept this charge—but there have not been congressional hearings yet.

At present, the NAIC is simply drafting a set of “standards” for uninsured motorist data collection. At one time, when the NAIC was a more effective entity, the association would have thrown some resources behind this project. A new model law or regulation would have been drafted. States would have received expert technical support and architecture. Today’s NAIC simply does not work in such aggressive and effective ways.

Watching the NAIC is not exactly akin to watching a Shakespearean play, but there are parallels. The late actor Laurence Olivier opened his 1948 film production of “Hamlet” with a voice over in which explained, “This is the story of a man who could not make up his mind.” Increasingly, the NAIC seems to suffer from the same condition. I hate to ruin the story for the NAIC staff leadership, but the play does not end well for Hamlet. *

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