Harvey Rosenfield flew into Boston from his organization's home in Santa Monica to share the results of a new study that claims no-fault insurance is a "disaster" for consumers and a "bonanza" for insurers.
via the IJ
I am sure the Massachusetts insurance regulator appreciates “foreign” consumer advocates who fly in and dump on the state’s “pro-consumer” insurance regulatory policy. In a report that looks at state averages, no-fault appears to be more expensive than traditional tort liability to the tune of some 37% (comparing MA and CA). [Massachusetts is the dean of no-fault instituting it in 1971]. One of the ironic drivers of no-fault costs appears to be litigation. No-fault covers personal injury, but not property damage. As most auto accidents involve some property damage, there still is a claim to settle and that can imply litigation.
The State of Massachusetts is more involved in the insurance rate setting process than probably every other state except, perhaps, California. Rosenfield’s suggestion is to repeal the state’s insurance antitrust immunity and let each company set rates and then determine whether the rates are appropriate. Massachusetts has problems in auto insurance. Its rates are among the highest in the nation, it has only a handful of companies willing to write insurance in Massachusetts—all the big names have left. There is massive fraud in the system (although the fraud is being aggressively attacked) and there is no political will to change the system. It is a system that is ready for reform and it was discussed briefly when the new Republican governor took office. (See here and here) Unfortunately, only commercial insurance purchasers received the break from deregulation. [For a nice treatment of the Massachusetts problem see Tennyson, Weiss and Regan’s paper on the Massachusetts Market and regulation.]
One problem with Rosenfield’s analysis is that he thinks that the insurance industry loves no-fault because it leads to increased cash flow.
At his press conference near the State House in downtown Boston, Rosenfield maintained that insurance companies love no-fault because of the investable cash flow it produces. For them, he said, no-fault is a "cash cow" and a "bonanza." via IJ.
This reasoning is suspect. While increased premiums are good for insurance companies, they still have to pay losses, which aren’t so good for insurance companies. No fault is a short tailed line (payments to injured parties are made relatively quickly) and thus there isn’t tons of time for investment income gains. So no fault may increase premiums, but it has to increase losses too. If Massachusetts was such a profit opportunity for insurers, one would at least see insurers vying to write in Massachusetts rather than running away.