You can post a bond as an alternative to insurance in most states (it's $35,000 in California). The system is opt-out and people can self-insure if they feel like it's a bad deal.
Generally, it's a better deal to stick with the insurance. The real killer for a car accident is if there is a lawsuit and the insurer can do those much more cheaply than you can.
> I can't prove collusion, but mandatory insurance seems wrong.
I do not know how it works in the USA. But in Spain the mandatory insurance is for 3rd parties, for the damage that you may cause to others.
It has historical roots. A driver will crash their car and damage or kill others. That driver has no insurance and no cash. So the victims are left with high costs and probably in poverty. Mandatory for 3rd party insurance assures that when that happens, the victims can collect some money that will alleviate their economic situation.
This is how it works in the states or at least in California which I am most familiar with. It’s divided into two parts: liability (damage payout to other party if you are at fault) and comprehensive (damage to your vehicle where someone else’s is not at fault). If you get into an accident and are at fault, your insurance liability pays out to the 3rd party and your comprehensive coverage pays out to fix your stuff if you opted in. Only liability (property and medical) are required as that makes the other party whole if you’re at fault.
The mandatory 3rd party insurances in Germany caver a minimum of 5 million Euro per case, mine is 10 or 12. Makes sense, especially if factor in stuff like loss if life and disability.
Does anyone know why in the US it is common to only be car liability insured up to around $200k while in Europe the standard is tens of millions? (The US maximum that I've seen possible is $2m when adding "umbrella" insurance.) This just doesn't make sense to me, especially in the face of local health care cost: what do you do if you're at fault in an accident that disables a family a four who have to spend millions in health care costs over the next several decades? (I'm even more confused because US car liability insurance is not cheaper than in Europe, despite two orders of magnitude difference in coverage.)
The cost of suing, proving damages, and recovering the money is such that it rarely makes sense to try to recover money from individuals. 99.9% of the time, a policy limit settlement is the most you’ll recover, and that kinda disincentives insurance companies from voluntarily offering higher policy limits.
(Also I’d wager that more people have only the legal minimum liability than not, which even in CA is $5k property, $30k injury)
Is it cheaper to sue and recover money over there / do people actually expect to recover $1M from individuals? Or is it that governments require insurance companies to offer the higher limits to cover actual damages?
Thanks, this makes a lot of sense. Essentially the legal system is too broken. In Germany, the legal minimum is about €9m, but standard coverage is €50-100m. Not sure how things go regarding enforcement, but there are a couple of stories where an accident destroys a bridge etc leading to very large payouts. I guess if you get into a bad crash with a travel bus this could also lead to massive liability.
Here in Japan, car insurance with unlimited/unlimited liability for person/property is pretty basic. It is considered that why unlimited is important is because normal people isn't good to estimate how much max liability is needed. Anyway no one would abuse unlimited insurance (but may abuse within limited range) so set it unlimited won't up insurance fee much. IIRC Some insurance also offer something like 50M JPY limited plan but it just save about 2k JPY per year (YMMV). Anyway, the point of insurance is to cover very rare unpayable reparation event, so why not unlimited?
I guess insurers want to avoid being bankrupted by a single disaster, and prefer that the insured person goes bankrupt instead. Unclear what is the socially optimal policy, but I'd anyway assume if a car accident ever causes like $1B in damages, government will end up paying the bill.
If health care wasn't covered publicly in Europe you'd be paying out those larger amounts more often which would cause rates to rise and then differentiation with cheaper lower capped offerings.
Eh, I know people who work in insurance (Cali specifically) and auto insurance is not their bread winner. It's _heavily_ regulated, and not in the insurer's favor. So any supposed "collusion" isn't really helping them. If you're with a reputable company and took the time to set up your policy optimally, your auto insurance ends up being about as good a deal as you're going to get anywhere.
(FYI, the real steak and potatoes in that industry is life insurance policies. They can make more on that than anything else combined.)
> 15k, 30k, 5k liability doesn't cover much. So little why mandate it?
Capped liability seems stupid to mandate.
In the Netherlands, liability insurance is mandatory and uncapped. The insurance company will pay, and then do their best to recover money from you. It doesn't take you of the hook. It just ensures the hurt party gets their payout immediately and unconditionally.
That seems like a better system than what you described.
I wish we did cap (or even fix?) liability to repair the other’s vehicle.
If I crash into your $1m stained glass car, that should be mostly your problem. The highway is not a place to store your work of art.
If I sensibly drive a $5k used Toyota that’s easily repairable, that should be good for my insurance, not yours in the way of lower liability premia.
Maybe make it like « the car needs a new paint job, here’s your $1k cheque, we don’t care how difficult the manufacturer made it for you to repaint it. If that’s a problem for you, decide better on your next auto purchase. ». But then insurance adjusters would be out of business and half the reason for insurance, having someone else figure out for me what the damages are so I don’t get screwed, has just disappeared.
I don’t think it’s as different as it appears at first glance.
Capped coverage does not mean that’s the max a hurt party is able to get, just the max a particular policy will cover per incident. The hurt party’s insurance generally advances any cost they incur immediately as needed and their insurance company recovers the money from the at fault party.
The caps are an important part of the policy because the policy holder can balance the risk of how likely they will be in an at-fault incident and how much that will end up costing total.
I lived in Melbourne, AU for a while, and their system seemed good. The third-party insurance wasn't mandatory (like here in the EU), only recommended. But you could buy insurance (something like reverse third party insurance) where if someone crashed into you, the insurance would pay you for the damages and then they'd get the money from the other person. It was very cheap.
Note, however, that a form of third-party insurance is included in the vehicle registration fees: https://www.vicroads.vic.gov.au/registration/registration-fe.... For a regular car, the TAC charge and its 10% insurance duty are somewhat more than the registration fee (my most recent annual renewal had a $302.40 registration fee and a $413.60 TAC charge + insurance duty, as one garaged in a low-risk zone; that increases to $532.40 if you’re in a high-risk zone, which looks to be not far off “metropolitan Melbourne”).
The TAC charge being a form of third-party insurance and mandatory commonly misleads people into thinking that what’s normally called “third-party insurance” is mandatory, but as you say, it’s not.
You are just insuring your own property and for any damages the insurer will just go after the party at fault if it isn’t you (or “you” as defined in their policy wording). Pretty simple way to keep rates down the r profits up for insurers.
It depends on how it’s implemented, but mandatory insurance should help lower the premium of everyone.
Like OP says, you should only buy insurance if it’s worth it. I never had an accident in 10 years of driving so I probably would not pay for insurance if I didn’t have to.
Now, if my record wasn’t so clean, I probably would pay voluntarily.
This means that now I pay a little bit but crash-prone people pay less.
Not sure I fully follow. Indeed in a way it's a gift to the industry to make insurance mandatory as it creates a bigger market. But there's no 'mandatory profit'. At the end of the day the world of finance is highly competitive, there's thousands of insurance companies. These are all pushing pricing down to the average costs of the loss events. The fact insurance is mandatory doesn't prevent that competition, if anything, it increases it, and through economies of scale makes it more efficient. I'd bet that ceteris paribus, the premiums for an insurance package for a large market are closer to the average uninsured costs than insurance for small niche markets.
Second, it's mandatory because otherwise the incentives don't really line up, especially psychologically, for a lot of people.
After all, the point isn't just to insure yourself, it's also to insure against damage to other property or bodies than your own. If you're poor, old, sick, and drive a worthless car, you wouldn't be so much incentivised to carry insurance to pay out damages when hitting an expensive car another person. It could very well be that without mandatory insurance you'd have all kinds of damages on the road that would never be compensated due to the financial situation of the driver.
> And yes--there will be the obligatory story about the uninsured driver, but 15k, 30k, 5k liability doesn't cover much. So little why mandate it?
You may say 'but it's a small amount so who cares', but that's a bit silly. Either make the argument that the premiums/coverage are too low, or too high, you can't do both. If it'd make sense for $300k coverage but not for $30k, then you'd have to be making the argument that minimum insurance premiums should 10x, not to go away completely.
Self-insure is no magic panacea. For one it typically involves putting up a bunch of cash in a no/low-return bond, typically averaging around 50k, which has opportunity costs (in the form of returns on investment) that aren't too dissimilar from just paying out an insurance premium. After all, if you take the S&P500 returns, cut it by 50% for good measure, you're still at 2.5k a year in opportunity costs, which is a multiple of the average annual car insurance in California.
This idea that rates would be halved comes completely out of nowhere, says who? Hell, insurance companies are de facto law firms, which take much of the headache of many claims out of your hands, and efficiently because it's their bread & butter, and with much more power. Not cheap or fun doing that yourself.
Insurance isn't perfect and the article's discussion on over-insurance is valid, but a lot of insurance packages (if properly negotiated) are actually quite competitive and efficient.
Where mandatory insurance completely sucks is differentiation. For example, if you drive 5% of the average rate, you're overpaying massively. If you're driving in a village with 5% the amount of traffic and lower loss probabilities, you're overpaying massively. But states with self-insurance suffers from the same issues lacking differentiation. It's at the end of the day a data issue you have to solve, regardless of whether you insure yourself or purchase insurance.
Since I started driving in CA, I always felt the rate was to high for minimum auto insurance.
The big players have had some competition with pay per mile, but you need a computer connection to use the service, and even then it's gimmicky.
I have been told the Insurance Lobby in Sacramento basically runs the show. They give politicians a lot of money.
I can't prove collusion, but mandatory insurance seems wrong.
And yes--there will be the obligatory story about the uninsured driver, but 15k, 30k, 5k liability doesn't cover much. So little why mandate it?
I would like to see large economy's, like CA, self insure. I bet we could pull it off, and rates might be halfed?
Be it auto, homeowners, etc., I don't think insurance should be mandated, especially for profit.