Revisiting a Modest Proposal on Mandatory Auto Insurance

On a few occasions, I’ve pondered the idea of whether or not auto insurance should be mandatory. It’s an issue I am decidedly wishy-washy on. On the one hand, my inner libertarian demands that folks be able to make their own financial decisions without dictatorial intervention by the state. On the other hand, if you’re going to be driving large metallic objects around at high speeds, you should be prepared to remedy any damage you might cause in a crash.

So, to be crystal clear, I am neutral on the idea of mandatory auto insurance.

However, for the sake of argument, let’s assume that society has deemed mandatory auto insurance to be a good idea. In that case, you have to wonder if the private insurance market is really the best mechanism to provide that coverage.

Within the private market, competitive pressures create a situation where insurance rates and eligibility tend to be very closely tied to expectations of how risky the insured really is. All too often, the folks who are the riskiest are the least able to afford such coverage, which gives rise to all sorts of regulatory and political pressures to introduce inefficiencies into the private insurance marketplace. See, for example, Massachusetts, where for the past several decades, insurers have been incredibly limited in their ability to price freely, and the market has suffered.

If some minimum level of auto insurance is deemed necessary by society, and if society demands subsidization to make coverage affordable to all…you have to begin to wonder if the result is something that has become a social benefit/entitlement, rather than an insurance product meriting private support and investment.

With that background, I can imagine an alternative mechanism to provide both “mandatory minimum” and “optional excess” auto insurance, which I’d be very tempted to explore if I could just wave a magic want and will it to be so.

Imagine a two-tiered system. The basic “mandatory minimum” coverage would be state-underwritten, providing some minimal level of BI/PD liability coverage (and perhaps PIP/Med Pay) within the borders of the state for all vehicular risks, auto and commercial.

Excess coverage, including higher liability limits, out-of-state coverage, comprehensive, and collision, would be marketed much the way auto insurance is marketed today — through private insurers — except with perhaps less regulation, since the societal pressures of covering everyone affordably would be addressed with the universal state-provided coverage.

I would imagine that state-provided mandatory minimum coverage would have claims-servicing handled by the involved private insurers when the insured driver carries a traditional “optional excess” coverage, much the same way that auto insurance claims are serviced now, save that the loss and loss adjustment expense would be ceded back to the state.

For drivers who carry only the state-provided mandatory minimum coverage, I could see insurers bidding out to take a share of the claims in return for a claims-handling fee negotiated with the state.

Since state-provided mandatory minimum coverage is intended to be universal, you’d want to ensure that every covered driver is contributing to fund the risk. However, rather than rely on traditional premium payments (and the hassles of issuing bills and getting money from folks who don’t want to pay), I’d be inclined to fund coverage through a few different means available to the state.

One mechanism would be the basic pay-at-the-pump idea promoted by (among others) Andrew Tobias. Add an x cent-per-gallon surcharge to the price of gas, thereby creating an environment where folks who drive the most, and drive the heaviest vehicles pay the most for coverage.

Another mechanism could be the use of piggyback fees/taxes on vehicle registration fees, tickets, licensing fees, etc. This would create an environment where insurance funding could be varied in recognition of different risk profiles due to driving records, driver experience, class of vehicle, etc.

And, another mechanism could be a simple rider attached to property and/or income taxes, to address the social concern of certain folks being more or less able to pay for the mandatory coverage.

Like I wrote earlier, I’m not convinced that mandatory auto insurance is the best idea in the world. However, I do think that excessively regulating the entire spectrum of auto insurance rating and underwriting is a poor mechanism to enforce a societal goal. A fairer, more sensible scheme should be possible.