Hawaii’s World

By A.A. Smyser

Tuesday, February 25, 1997

Evaluating auto
insurance law reform

FOR sure the Legislature will soon pass a new auto insurance law. Probably Governor Cayetano will sign it. For sure it will lower premiums.

But will it be a good law? How will we tell?

Let's keep our focus on how many cents of each premium dollar go to pay actual benefits to people who suffered losses.

Let's require that a projection of this number be issued when the law is passed and that it be updated annually based on real-life experience.

It is a benchmark that will help us know whether we are getting better insurance or just shoddy merchandise.

In recent years, it appears, 40 to 50 cents from every premium dollar has gone to others - not consumers.

That is too high. We can fight about whether the blame lies with insurance companies, the tort system that throws too many cases into litigation and/or the law itself. But we can hardly argue that's the way it should be when our big medical insurer, HMSA, manages to hold overhead to around 8 percent.

Health insurance is no-fault. We are covered to the extent of our policies no matter how we came to need medical care. It's pretty much the same with fire insurance, short of deliberate arson. Carelessness doesn't void being covered.

If the new auto insurance law can lower overhead to, say, 25 percent to 30 percent instead of the current 40 to 50 percent, we consumers will be buying a better quality product.

But if it just reduces benefits and keeps the overhead high it won't deserve to be called "reform" - just a shift to cheap merchandise. If that's the case many car owners will want to supplement their coverage beyond what the state mandates. They may end up paying out the same as ever.

If we shift medical/hospital care over to our personal insurance plans that may be good in terms of lowering overhead, as suggested above. But we need to be up front about it and know it will raise our personal health premiums.

To sock employers with the extra cost may seem easier politically than laying it on us directly - but it won't be fair and will further increase Hawaii's image as a terrible place for small business.

And it won't be fair, of course, to ignore that cost when the shouting begins about how much auto premiums will be reduced.

I have a couple of pie charts from 1992 and 1994 showing how the Hawaii personal auto premium dollars were distributed. Pain and suffering was the biggest both years - 26 cents and 22 cents respectively. That's the area no-fault is supposed to reduce while it focuses on quicker, faster compensation for medical care, rehabilitation and wage loss.

THE second biggest chunk of the dollar went to auto repairs and property damage - 23 cents in 1992 and 20 cents in 1994. Much of this also has to be litigated rather than simply paid outright.

Claims expense was 12 cents in 1992 and 14 cents in 1994.

Operating expense is right up there - 23 cents in 1992 and tied at 22 with pain and suffering in 1994.

Put them together - operating expense, claims expense and the one-third of pain and suffering awards that customarily goes to lawyers - and I get 43 percent overhead for both years. A national study said it was even higher in 1995 - over 48 percent.

Auto insurance premiums total hundreds of millions of dollars every year. To have nearly half of that gobbled up by insurers, lawyers and the courts explains the intensity of the current special-interest maneuvering over change. It also explains why we need to fight to keep consumer interest foremost.

A.A. Smyser is the Star-Bulletin's contributing editor.
His column runs Tuesday and Thursday.

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