What Is Involuntary Insurance?

What Is Involuntary Insurance?

While insurers recognize that involuntary markets are needed to provide coverage for a few drivers, they generally do not support plans which rely on huge subsidies from lower risk to higher risk drivers. Objections range from the theoretical to the practical.

On theoretical grounds, insurers support cost-based pricing and oppose interferences with actually sound methods of pricing insurance. Although such an approach may not be politically feasible in some places, insurers generally believe it would be better to provide direct taxpayer subsidies to people who need to have but cannot afford to buy auto insurance at fair market prices. Find general car insurance online.

Insurers prefer this solution to the current practice in some states of making insurance companies responsible for collecting an in tax on some groups of drivers to subsidize the premiums of other groups. The extent of the annual subsidy can be seen in Massachusetts. The cost to Massachusetts auto insurers of subsidizing the residual market in 1986 was $566 million, which amounted to an added $363 in auto insurance costs for the average voluntary market policyholder. In 1987, the deficit was more than $672 million.

The biggest practical difficulties with subsidies—difficulties that threaten the very viability of private auto insurance—occur when insurance regulators demand large subsidies for the involuntary- market, while at the same time prohibiting insurers from charging sufficient premiums to help fund the subsidies. The obvious question, then, is where is an insurance company supposed to get the funds the state demands in the way of subsidy?

Nowhere has this problem been more acute than in the state of New Jersey. In 1973, New Jersey enacted a compulsory auto insurance laws that required drivers in that state to purchase far more insurance coverage than is required in most states. Following this legislation, both claims and insurance premiums increased substantially relative to trends in other states. By 1983, New Jersey had the highest auto insurance premiums in the nation. Get general car insurance quotes.

Even though premiums had risen by more than 200 percent, they were still inadequate to fund losses which had risen at an even greater rate. As a result, even with the highest auto premiums in the country, New Jersey had the nation’s highest loss-to-premium ratio. State insurance regulators flatly refused to allow auto insurers in the state to charge premiums sufficient to fund losses. Under such business conditions, insurers were less and less willing to insure the state’s drivers.

The result was that more and more drivers were unable to obtain insurance in the voluntary market and turned instead to the involuntary market, which increased from about 10 percent of the state’s drivers in 1974 to more than 42 percent in 1985. Compare general car insurance.

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