Why car insurance in America is actually too cheap (2024)

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In 2010, Eric DuBarry and his two-year-old son Seamus were crossing a street in Portland, Oregon, when an elderly driver mistook the accelerator for the brake, and ploughed into the pair and another man. They were flung across the street—the pram wrapping itself around a lamppost. In hospital that evening, Michelle DuBarry, Seamus’s mother, recalls “this realisation of, my God, how are we going to pay for this?” The day after the crash, Seamus died. The hospital charged the couple’s insurance $180,000 for his care. The DuBarrys had to raise $4,500 of that themselves; and had no coverage for the time off work they had to take. Ms DuBarry thought that at least the driver’s car insurance would pay for some of those costs.

She quickly discovered that there was little hope of that. The driver who killed Seamus had just $100,000 of liability coverage per victim. Before the DuBarrys saw a penny, their health and car insurers claimed the entire amount to cover their costs. Eventually, with the help of a lawyer, they clawed some back. But, says Ms DuBarry, “I still was just left with this feeling: How can it be this hard?”

She began campaigning for a change in the law in Oregon which had allowed hospitals and insurers to get the first bite of any settlement—and succeeded. Yet the real problem, she points out, was the low level of liability coverage. “In Oregon, the minimum amount of insurance you’re required to have is $25,000,” she says. “Even if you’re just admitted to the ER, there’s not going to be money left over.”

Car insurance in America is getting far more expensive. In the year to December 2023, prices paid for it, as measured by the consumer-price index, rose by 20%, even as inflation overall moderated. Prices are often controlled at state level, but regulators are approving the increases because the industry is losing money hand over fist. According to the American Property Casualty Insurance Association (APCIA), a trade association, last year insurers paid out $1.08 in claims for every $1 in premiums they took in.

And yet what Ms DuBarry’s story shows is that, in fact, American car insurance is still far too cheap. As much as drivers may resent paying higher premiums, insurance covers only a small fraction of the costs inflicted in car crashes. Instead, health insurers, government and drivers involved in crashes shoulder the burden, and victims are rarely fully compensated.

According to a study published last year by the NHTSA, America’s highway-safety regulator, the direct economic costs of car crashes in 2019 was $340bn, or about 1.6% of GDP. Yet the NHTSA says insurance—and not just car insurance—covered just 54% of that. The agency put the true social cost, including lost life years, at nearly $1.4trn. In 2019, 9m people were involved in serious car crashes; around 4.5m people suffered injuries and 36,000 were killed.

Since then, the number of severe crashes has climbed. It is hard to say exactly why. New, heavier sports utility vehicles and pick-up trucks seem to be deadlier. Since the pandemic, traffic has spread out more evenly through the day, and so speeds have increased. Insurers also point to more people driving while looking at their phones. Whatever the cause of the spike, in 2022 nearly 43,000 people were killed in car crashes, including 7,500 pedestrians—the highest figure since 1981.

America’s spartan car insurance stands out in the rich world. Legal minimum bodily-injury coverage varies state by state, but nowhere does it pass $100,000 per accident. According to the Insurance Research Council (IRC), an industry data group, 29% of claims nationally (and over 50% in several states) involve people insured at the state minimums. Few policies go beyond a few hundred thousand dollars of liability. The cost of a serious crash “is never going to be covered by that”, says Dale Porfilio, of the IRC. By contrast, in Germany drivers are required to have €7.5m ($8.2m) of bodily-injury coverage, and in Britain liability is unlimited. And in those countries, going into hospital does not mean running up a life-altering bill.

Hardly by accident

Why not raise the liability legal limits? The problem, points out Robert Gordon, a vice-president at the APCIA, is that it would make insurance cost more. And that is deeply unpopular.

In October California raised its minimum limits for bodily-injury coverage—but to just $30,000 per victim. A few states are going in the other direction. Michigan, where car insurance is “no fault”, which means that victims claim from their own policies regardless of whose fault the crash was, in 2019 removed a requirement for people to buy coverage for unlimited medical costs. That led to a big drop in premiums, defying the national trend (previously Michigan drivers had higher bills than most). Gretchen Whitmer, the state’s Democratic governor, considers that to be a victory for consumers.

Cheaper premiums do not mean that the costs go away. Indeed, as prices rise nationally, in part because of the greater number of crashes, some worry that more drivers will forsake buying insurance altogether. Already around one in eight American drivers is not covered, a far higher share than in other rich countries. David Abels, a personal-injury lawyer in Illinois, says that “in reality, you have to protect yourself.” Drivers are subsidised, and society at large pays the bill.

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This article appeared in the United States section of the print edition under the headline "Crashing truths"

United States January 20th 2024

  • Why are Americans so gloomy about their great economy?
  • How did the Iowa result change the Republican primary?
  • Where Donald Trump still looks vulnerable
  • Why car insurance in America is actually too cheap
  • America’s southern border has become a global crossroads
  • The election in Georgia could be as pivotal as it was four years ago
  • It’s not the Trump Party quite yet
Why car insurance in America is actually too cheap (1)

From the January 20th 2024 edition

Discover stories from this section and more in the list of contents

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As an insurance industry expert with a deep understanding of the complexities surrounding car insurance in the United States, I can provide valuable insights into the challenges and issues highlighted in the article dated January 18th, 2024, from Chicago.

The story of Eric DuBarry and his son Seamus tragically illustrates the inadequacies of the American car insurance system. The incident in Portland, Oregon, where an elderly driver's mistake resulted in severe consequences for the DuBarry family, sheds light on the broader problems in the industry.

One key aspect mentioned in the article is the rising cost of car insurance in the U.S. As of December 2023, prices increased by 20%, outpacing overall inflation. The American Property Casualty Insurance Association (APCIA) reports that insurers paid out $1.08 in claims for every $1 in premiums, indicating a substantial financial strain on the industry.

However, despite the apparent increase in premiums, the article argues that American car insurance is still too cheap. The case of Seamus DuBarry's tragic accident reveals the shortcomings of liability coverage. The driver responsible had only $100,000 in liability coverage, and the hospital claimed the entirety of that amount, leaving the family struggling to cover additional expenses.

The article points out that the minimum liability coverage required by law in Oregon is $25,000, a figure that falls significantly short of covering the actual costs associated with severe car crashes. This situation is not unique to Oregon, as the legal minimum bodily-injury coverage varies from state to state, with none exceeding $100,000 per accident.

The inadequacy of these coverage limits is further emphasized by statistics from a study by the National Highway Traffic Safety Administration (NHTSA), which states that in 2019, insurance covered only 54% of the direct economic costs of car crashes. The true social cost, including factors like lost life years, was estimated at nearly $1.4 trillion.

The article raises the question of why liability legal limits are not raised to better align with the actual costs incurred in severe car accidents. Robert Gordon, a vice-president at APCIA, suggests that increasing liability limits would lead to higher insurance costs, a proposition that is met with resistance from consumers.

While some states, like California, have raised their minimum limits for bodily-injury coverage, the amounts remain relatively low. The article notes that increasing liability limits is unpopular due to the associated rise in insurance costs. The challenge lies in finding a balance between affordable premiums and coverage that adequately addresses the true costs of car crashes.

In conclusion, the article highlights the disparity between the rising costs of car insurance, the inadequacy of liability coverage, and the broader societal impact of underinsured drivers. As an expert in the field, I concur with the assessment that the current state of American car insurance is indeed posing challenges that need thoughtful consideration and potential reforms to better protect individuals and families in the face of tragic accidents.

Why car insurance in America is actually too cheap (2024)

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