California Prop. 213 will Reduce Auto B. I. Claims

Department's Calculation of 12.5% Savings Appears Overstated

California's Proposition 213, which became effective January 1, 1997, eliminates the right of uninsured motorists to sue for pain and suffering. Insurers conducting business in California must file revised bodily injury liability rates by late February 1997, reflecting the anticipated savings.

The California Department of Insurance, in an exhibit titled Impact of Disallowing Uninsured Motorists from collecting Pain and Suffering Payments on Auto Liability Policy in California, calculates an anticiated savings of 12.50 percent (on bodily injury liability premiums) as a result of this restriction on uninsured motorists.

However, as pointed out to AR editors by Gary Dean, this exhibit has a flaw in the claculation and a corrected calculation indicates a savings of 8.68 percent rather than 12.50 percent. The department calculated that, given that 28 percent of the drivers are uninsured, 40.32 percent of two car accidents (28 percent x 72 percent x 2) would involve an insured driver and an uninsured driver. It was then assumed that 40.32 percent of insurance claims for pain and suffering losses would be eliminated. Dean pointed out that this calculation is incorrect because the 40.32 percent figure includes accidents in which the uninsured driver is at fault. Further, 40.32 percent is a percent of all accidents instead of a percent of accidents in which at least one driver has bodily injury coverage.

The calculation can be corrected, given the underlying assumptions, by realizing that the probablility of an insured driver hitting an uninsured driver is 28 percent, and therefore only 28 percent of the pain and suffering losses whould be eliminated.

Richard Roth, chief property/casualty actuary at the department who was not incolved in the preparation of the department's estimates, explained to AR editors that the percentage of drivers who are uninsured may reduce from 28 percent as a result of increased penalties for driving without insurance.