A Comparative Economic Analysis of Tort Liability and No-Fault Compensation Systems in Automobile Insurance

Abstract

Based on an analysis of annual loss ratio data by state for automobile liability insurance during 1975-1980, the economic impact of no-fault automobile insurance on the relative benefits and costs to consumers and on the predictability of relative loss costs for insurers is assessed. Several hypotheses are tested by using some regression models. The results suggest that no-fault automobile insurance tends to increase relative benefits or decrease relative costs (prices) to consumers, but in the short run it does not improve the predictability of relative loss costs for insurers. From a public policy viewpoint, these results seem to suggest that a no-fault compensation system performs more efficiently than a tort-liability system for automobile insurance consumers. I. Overview and Purpose Criticisms of the efficiency and fairness of the tort liability compensation system in automobile insurance culminated with the adoption of no-fault compensation systems in 24 states in the 1970's. No-fault automobile insurance is a first-party coverage under which each driver accepts financial responsibility for some or all losses and injuries sustained by occupants of his or her own car, pedestrians hit by his or her car, and himself or herself in exchange for partial immunity from liability for losses to third parties or other drivers and their passengers. This means that recovery of losses from automobile accidents within certain limits is available to victims without regard to fault. In contrast, under the tort liability compensation system, fault or