Auto Choice: Impact on Cities and the Poor

The current system of paying for auto injuries suffers from two fundamental problems: premiums are too high and victims with serious injuries rarely receive full compensation. Of particular concern is how the shortcomings of the present tort liability system adversely impact low-income and urban households. This paper reviews the causes and consequences of a costly and inefficient auto insurance system, and discusses the benefits and savings that the Auto Choice reform would produce. All of the shortcomings that characterize the auto insurance system are worse for urban drivers and low-income families. Although accidents in cities are less severe than accidents elsewhere, they are much more likely to result in an injury claim. As a result, it costs 47 to 57 percent more to pay injury claims in cities than in other areas. Moreover, because high premiums make it more difficult to own a car, many low-income, inner-city workers are unable to access better-paying suburban jobs. Families earning less than half of the poverty line spend an average of one-third (31.6 percent) of their income on premiums when they buy auto insurance. The regressivity of the current system is heightened by that fact that the typical low-income household spends more on auto insurance in two years than the value of their car. This analysis finds that Auto Choice would reduce overall premiums by 24 percent nationwide, averaging $184 per car. Auto Choice would make over $35 billion in savings available to consumers in 1998, and up to $193 billion over 1998-2002. Since low-income families often forgo the optional collision and comprehensive property damage coverage, their personal injury savings represent a larger share of their overall premium - 36 percent on average. Lower auto insurance premiums will make owning a car more affordable for the poor, thereby allowing them to find and hold down better-paying jobs that require a longer commute.