Santa Monica, California-based RAND Corporation has repeatedly issued studies suggesting that no fault will lower premiums (even though it never has). This is a review and discussion of the RAND reports, along with correspondence from FTCR to RAND que
The California-based RAND Corporation has issued a series of widely distributed reports on no fault auto insurance. Press releases accompanying the reports invariably suggest that no fault proposals would dramatically lower insurance "costs" in many states.
The RAND reports have been widely touted by no fault supporters to bolster their argument that no fault will lower premiums. However, the studies utilized highly questionable and sometimes severely flawed assumptions; the resulting conclusions are inaccurate and often misrepresented.1
Moreover, the "savings" described by RAND are in the form of lower costs to insurers, not lower premiums for policyholders — a point always omitted from the publicity generated by RAND and the insurance industry.
Data and Methodology. In undertaking their initial 1991 analysis, RAND's researchers had two serious problems: First, RAND had no access to independent data. All of its data was obtained from insurance industry sources. The integrity and credibility of the data are questionable. Second, the data obtained — directly from the insurance industry — was incomplete. RAND was forced to make numerous assumptions and extrapolations, some of which are erroneous or unjustified.
Faulty data and questionable methodology render the RAND report's conclusions suspect. Here are the chief defects in the report's protocols:
Data Source. RAND used insurance industry data for its study. This data was not verified either by RAND or by an independent regulatory body such as the National Association of Insurance Commissioners.
Use of Industry "Closed-Claim" Data. RAND based much of its report on extrapolations from an insurance industry trade group's own study of claims closed by thirty-four insurance companies over a two week period in 1987. Insurance industry experts themselves warn against using closed claim studies to estimate insurance costs because smaller claims are over-represented and larger, more expensive claims are under-represented in such studies, especially during periods when the average size of a claim is growing. This is a particularly serious defect in the RAND report, since no fault's benefit system increases the amount paid out for higher claims. Since RAND's data already inflates the proportion of small claims, the net result is major under-estimates of no fault's likely cost.
Moreover, the industry data contains estimates of medical and other bills which may be submitted by the claimant in the future. These estimates, however, are made by insurance adjusters, not the claimants. Insurers have a variety of financial and tax incentives to inflate such estimates wholly apart from attempting to influence the outcome of a study. Thus, the data is inherently unreliable and depends on estimates by individuals who may have little knowledge of or expertise in guessing what a particular policyholder may claim in the future.
Use of Industry "Consumer Panel" survey. Since the closed-claim database did not include data on people who filed no claims, RAND used industry polling data from households where a person was injured but did not file a claim. But the industry itself has noted that such data may not be demographically representative or reliable.2
Use of "Special Tabulations" Made by the Industry for RAND. The Insurance Services Office, an industry association that disseminates pricing and other data to most insurers pursuant to the industry's federal antitrust exemption, provided RAND with a special computer run. The reliability of this data is unknown.
Extrapolation of Consumer Behavior. RAND assumed that in any given state, people's behavior will remain the same regardless of whether the system is changed to no fault. This is untrue; the availability of first party payments may encourage injured people to file claims who do not presently do so — perhaps from fear of insurance rate increases. Moreover, the fact that thresholds of all kinds gradually fail to limit litigation suggests that behavior within no fault systems itself changes over time.
Indeed, referring to the amendment of no fault in Massachusetts in 1988, an industry expert noted that the "actual addition costs [of] raising the PIP limit were roughly double what the commissioner assumed….What law makers failed to foresee were the behavioral changes of participants in the system which the auto reform precipitated."3
The RAND materials do not appear to acknowledge even the basic reality that under no fault, more claimants are paid — the motorist who caused the accident, in addition to the innocent motorist.
Another erroneous assumption with potentially great significance is that no fault does not reduce the accident deterrent effect of the tort system. There is literature indicating it does, though RAND dismisses it summarily.4
By under-estimating the impact of higher first party benefits upon claims behavior, the RAND report under-estimated the cost of no fault.
Savings. RAND's reports are widely quoted for the proposition that policyholders would reap large savings on their auto insurance premiums under no fault plan. However, the details of the report provide a different picture:
- Early RAND reports referred to savings in "total injury coverage costs." These are costs incurred by insurance companies. For example, RAND's definition of "total injury coverage costs" included the insurers' own legal fees and claim processing costs.5 The "savings" reported by RAND would go to insurance companies, not policyholders.
- The RAND report did not include property damage costs in its study. Property damage costs constitute about half of the typical auto insurance premium, as the RAND study acknowledged.6 Therefore, the "savings" for insurers suggested by the news reports are, at the least, inflated by 50%.
Compensation. The RAND reports rely on historical data, as opposed to projections, in reviewing compensation under no fault. The reports confirm that victims receive less compensation under no fault:
- According to the 1991 RAND report, on the average victims receive more net compensation (compensation left after legal fees and related expenses) under the tort system ($3,645) than under no fault ($3,182).7 Under traditional tort systems, 62% of victims receive additional compensation above their medical bills and partial wage loss; under no fault, only 26% receive the additional compensation.8
Most of the "savings" projected by RAND come from simply restricting the amount of compensation paid to victims. Referring to so-called low-coverage, "no frills" no fault plans proposed by the insurance industry in several states, RAND's authors admitted:
"No fault plans that slash costs tend to reduce the compensation less seriously injured people receive for non economic loss, such as pain and suffering. And they don't substantially improve the traditional system's treatment of the more seriously injured, who rarely recover even their economic losses in wages, medical payments and out-of-pocket expenses."9
"All no fault plans reduce transaction costs. However, with the exception of plans that ban claims for non economic loss, the net reduction in total costs provided by reduced transaction costs is only about 10 percent; the rest of the savings must come from reduced compensation."10 [Emphasis supplied]
Benefits for bad drivers. The RAND study also illustrates how wrongdoers benefit compared to victims in the majority of accident cases:Referring to drivers involved in accidents who are "… at fault or if the other driver was at fault but uninsured," the study says: "they will tend to benefit from no fault because they can expect to collect a larger fraction of their economic loss." [Emphasis supplied].11
But "if the other driver was both insured and at fault, the claimant's compensation will be lower under no fault than under the traditional system, because no fault limits compensation to economic loss." [Emphasis supplied].12
In summary, the initial RAND report confirmed that "injured people with more modest economic losses — who constitute the vast majority of those injured in auto accidents — lose because they receive no compensation for non-economic loss."13
Waste and delay in payments. The RAND study suggests that no fault will speed payment of claims by "an average of two months." But the RAND data shows that insurers still force claimants to wait inordinately long periods of time to be paid, and that there is no difference between no fault and tort systems in the number of claimants paid immediately after the accident:
- Roughly the same percentage of people (45%) are paid within three months of the claim under either the tort or no fault systems.14
- Under no fault, about 20% of claimants still wait an average of three to six months; under tort, about 40% wait three to six months.15
- The average claimant under no fault will still have to wait more than three months (116 days) to receive less compensation; under the tort system claimants wait twice as long (181 days) on the average, but receive more funds. 16
- The insurers' transaction costs are about the same percentage of the total "injury coverage costs" under either system — 12% for no fault vs. 14% for tort systems.17 No fault will do nothing to reduce the bloated nature of insurance industry overhead and bureaucracy.
The flaws in the RAND reports raise several important points about the typical debate around no fault's impact on premiums. Insurers inevitably attempt to dominate the debate by employing actuaries to "scientifically" estimate premiums under proposed no fault laws. However, experience in state after state proves that there is little science to such efforts and even less reason to rely on the results.
First, there is very little accurate data upon which to draw meaningful comparisons between states; the RAND studies demonstrate this, since RAND was forced to construct an elaborate computer simulation and make numerous assumptions about human behavior in order to conduct its investigation. Second, that data which is available comes entirely from the insurance industry and cannot be verified; it is subject to both manipulation and error. Third, insurer actuaries simply extrapolate existing data or, too often, hypothesize outcomes. Not surprisingly, actuarial analyses of various no fault proposals tend to support the insurers claims even after significant defects in their methodology are pointed out.
While it is clear that no fault in practice leads to premium increases rather than decreases, this is not to say that a no fault law could not be drafted which would lower premiums. Manifestly, severe limits on claims and compensation would so reduce payouts that insurers could reduce rates and still maintain their present level of profits. But this raises the related question, considered below, of whether such a policy would be of value either to the policyholder or to society. Again, such rate reductions can only be achieved through a series of massive subsidies between drivers.
Conspicuously absent from RAND's analysis of auto insurance legislation are the following topics RAND has never studied:
- The excessive waste, inefficiency and profiteering within the insurance industry — costs that come right out of the premium dollar consumers pay.
- Redlining, territorial rating and other forms of insurance industry abuse. It has never investigated the industry's claims settlement practices, a preeminent subject of the many market conduct examinations undertaken by insurance departments throughout the nation. (The failure of an insurance company to pay claims is a particular problem in no fault states, where the insurers are given great control over the payment of claims and attorneys are effectively prohibited from assisting consumers in such disputes).
- The question of whether the absence of individual responsibility, which is the hallmark of no fault systems, leads to reckless conduct by motorists, as some studies have suggested. Nor has RAND ever examined state regulation of the insurance industry or reforms such as Proposition 103.
- A qualitative and quantitative consideration of the impact on consumers of the reduction or elimination of benefits and coverages under no fault, including the right to obtain compensation for pain and suffering, a cornerstone of American civil justice that RAND essentially dismisses as a conduit for fraud.
C. Insurance industry funding of the Rand study raises questions. The original 1991 RAND report acknowledged that over 50% of the Rand Institute for Civil Justice's funding is derived from the insurance industry. In addition, the insurance industry is heavily represented on the ICJ Board of Overseers: board members include representatives from State Farm (two), Kemper, Aetna, GEICO, Travelers, Allstate, SAFECO, USAA, CNA, the Alliance of American Insurers (two), John Hancock, and the Property-Casualty Insurance Council.
Of the numerous law firms and associations represented on the board in 1991, only one was identified as a plaintiff law firm. The study states that "consumer groups" were asked to provide input; however, no insurance industry critics have been contacted by Rand. RAND's incomplete and selective approach to insurance reform, ranging from the use of industry supplied raw data to the pro no-fault tone of the report, as well as the acutely political timing of the publication of its no fault studies, coupled with industry sponsorship, funding and board control of the institution, cannot but raise questions about the objectivity of RAND's work on this issue.
D. FTCR Asks RAND to Respond. In February, 1996, the staff of FTCR's Proposition 103 Enforcement Project wrote RAND raises concerns about the results, timing and scope of its reports on no fault. Read:
1. RAND has previously acknowledged that over 50% of the RAND Institute for Civil Justice's funding is derived from the insurance industry. In addition, the insurance industry is heavily represented on the ICJ Board of Overseers: board members include representatives from State Farm (two), Kemper, Aetna, GEICO, Travelers, Allstate, SAFECO, USAA, CNA, the Alliance of American Insurers (two), John Hancock, and the Property-Casualty Insurance Council. Of the numerous law firms and associations represented on the board, only one is identified as a plaintiff law firm. Industry sponsorship raises concerns that may explain RAND's choice of presentation of the data to suggest that no fault will lower insurance rates or otherwise benefit consumers. Insurer funding may also explain why RAND has never studied the need for insurance rate regulation, the discriminatory redlining and territorial rating practices of insurers, the waste and inefficiency in the industry, the compensation of its executives, the need for private suits to force insurers to settle claims and the investment practices of the industry.
2. See Attorney Involvement in Auto Injury Claims, All-Industry Research Advisory Council (AIRAC), December, 1988, p. 35.
3. National Underwriter, December 23, 1991, p.4.
4. Carroll, et. al., "No Fault Approaches to Compensating People Injured in Automobile Accidents," RAND Institute for Civil Justice, R-4019/ICJ, December 1991. p.15.
5. RAND Report, p. 9.
6. Id., p.2.
7.Id., p. 10.
8. Id., p.11.
9. RAND Institute for Civil Justice, Press Release (National), p.2.
10. RAND Report, p. 17.
14. Id., p.13.
16. Id., p.12.
17. Id., p.10.