Mandatory Minimum Insurance

Riskprof asked, should auto insurance be mandatory, referencing a change in California, noted on Indemniblog, where sub-minimum limits coverage (10/20/3) is becoming more readily available to low-income households.

A few months ago, I wrote this post, sketching out how I might design a minimum-coverage plan if I were king. I never tackled the question of should auto insurance be mandatory….partly because I don’t have an easy answer for the question.

On the one hand, my inner libertarian cries out that consumers should be free to make their own economic choices free from government interference. If a consumer wishes to purchase insurance protection, let them. If the consumer wishes to take the risk…fine, but they’ll be on the hook if the do cause an accident.

On the other hand, my selfish side notes that some number of people (whom experience has shown to be more likely than average to cause accidents) will not bother to purchase coverage, and won’t be able/willing to make good on their liability in the event of an accident. Why the heck should I have to pay more (in the form of UM/UIM) to cover their irresponsibility?!

And over on that third hand I wish I’d grow, I can’t help but consider my experience as a claimant. My wife was seriously injured in a car accident over four years ago. We’re in litigation, and haven’t seen one cent in indemnification beyond the little bit covered under PIP. I can’t help but wonder if our claim would have been done a couple of years ago, if the guy hadn’t been insured, and if our UM would have kicked in automagically.

So, I really don’t know whether auto insurance should be mandatory. I think I lean towards “yes”, but I can’t help but observe that the cost of coverage can be prohibitive for the folks who can least afford it. If it is deemed in society’s best interest that all drivers have coverage, there ought to be a way to allocate the cost in a manner that, while actuarially unfair, satisfies the universal coverage goal in the least cumbersome way possible…and preferably preserves the free market for above-minimum-limits coverage.

It’s definitely an interesting question to ponder.

One other comment needs addressing. From Indemniblog:

This may be a controversial statement but with that limit of Property Damage liability ($3,000) you may be better off driving uninsured ” certainly you will be on the hook for any damage you do to someone else’s vehicle but you’re fooling yourself if you think that $3,000 can adequately cover damage to a vehicle you hit!

I’m not sure that I entirely agree with that statement. I see the poster’s point… but in my current auto insurance experience, I do see quite a few property damage claims in the $1500-$3000 range. While the policyholder is still exposed to accidents that are more serious than minor fender-benders…at least they do have the $3000 in PD available, which is better than nothing.

I think of the phenomenon as being similar to that of percent deductibles in homeowners insurance. You wouldn’t think that going from a $250 or $500 flat deductible to a 2% wind deductible would do all that much to benefit the insurer. However, when you run your HO book through the cat models…the benefit is more than you might expect.

I’d venture the guess that if you were to do an analogous process for auto, thinking of widespread $3000 PD limits as being a means to reduce UM-PD costs…you’d see similar benefits.