Study: Repealing Colorado’s No-Fault Auto Insurance Reduced Claim Costs

The repeal of Colorado’s no-faul automobile insurance law in 2004 has helped to reduce claims costs in the state, according to a recently released study by the Insurance Research Council.

In 2004, the first year after Colorado repealed its no-fault insurance law, auto injury claim costs returned to levels occurring prior to the rapid cost increases that culminated in repeal of the no-fault law in 2003. IRC’s study noted that between 1996 and 1999, auto insurers in Colorado paid between $209 and $226 in auto injury claims for every vehicle insured in the state. Over the next three years, the average injury payment per vehicle increased almost 50 percent, reaching $306 in 2002. In 2004, after no-fault was repealed, insurers paid $223 in injury claim costs per insured vehicle — 27 percent less than in 2002. Even with the drop in injury loss costs in Colorado, insurers paid 12 percent more, on average, for injury claims in Colorado than was paid countrywide in 2004, the report indicated.

The study, “Colorado Auto Insurance, Transition From No-Fault to Tort,” uses auto injury claim data from the IRC’s survey of automobile insurance companies, along with data from a variety of other sources, to examine how repeal of the no-fault insurance law affected overall injury claim costs and to document key characteristics of the current tort-based system.

The change from no-fault to tort corresponded with a drop in liability insurance premium costs in Colorado. Between 2002, the last full year under the no-fault system, and 2004, average liability premium costs in Colorado fell 15 percent, from $559 to $476. By comparison, countrywide average liability premium costs increased more than 9 percent over the same two-year period.

“These numbers show how consumers benefited from the repeal of Colorado’s no-fault insurance law,” said Elizabeth A. Sprinkel, senior vice president of the IRC. “While injury claim costs in Colorado were still higher than the national average immediately after repeal, they were much closer to the norm.”

The report also sheds light on Colorado consumers’ preferences regarding the amount of coverage they voluntarily purchase to provide first-party medical benefits in case of injury, IRC indicated. Not all policyholders choose to purchase MedPay coverage. Of those who do, however, and who file claims, more than half purchase coverage of $5,000 or less. The IRC found that 54 percent of MedPay claimants in 2007 had limits of $5,000 or less, while 70 percent had limits of $10,000 or less. Current proposals before the Colorado legislature call for requiring all drivers to purchase $15,000 or more in first-party coverage for emergency medical treatment. IRC’s findings suggest that this proposal would conflict directly with the demonstrated preferences of most Colorado drivers, who are purchasing coverage at much lower levels, despite the availability of coverage at the proposed mandatory levels.

For information on the study’s methodology and findings, visit IRC’s Web site at www.ircweb.org. Copies of the study are available at $50.

Source: Insurance Research Council