26 June 2008 Michael Dilger ADDRESS REDACTED NEW ZEALAND mike@mikedilger.com PHONE REDACTED TO: The Ministry of Transport thirdpartyinsurance@transport.govt.nz I am writing in response to the Ministry of Transport's "Compulsory Third Party Vehicle Insurance" discussion paper.    I have read the paper.    I commend you on opening this issue to discussion. I am AGAINST the institution of any compulsory third party vehicle insurance. Should any such scheme be instituted, I am FOR the option of bonding. ESTIMATING THE LEVEL OF UN-RECOVERED DAMAGES According to the paper, "the insurance industry estimates that recovering the costs of damage caused to insured vehicles by uninsured motorists range from 6.9 percent to 11 percent of total motor vehicle insurance costs annually." But in 1988, the "Select Committee Inquiry estimated that 11 percent of all motor vehicle claims involved uninsured parties, and that the costs of three percent of all motor vehicle claims were not recoverable because of unidentified or uninsured motorists." The insurance industry claim is likely to be biased, as an overestimate would put them in a financially advantageous position, allowing them to justify charging higher rates. The select committee inquiry finding of 3 percent may be somewhat out of date, as our traffic volume has grown.    But on a percentage-wise basis, it would still account for that growth. Thus, the three percent figure is more reliable. ESTIMATING THE LEVEL OF RECOVERABLE UN-RECOVERED DAMAGES BY CTPVI This three percent figure includes damage caused by unidentified motorists. No scheme could recover that damage.    This leaves less than 3% which might be recoverable through CTPVI. But even with a CTPVI scheme, some subset of drivers will operate illegally and offer no avenues of recovery.    These drivers are beyond any mandate. Thus this figure is whittled down even more. Without statistics available, it is impossible for me to estimate the net figure of present damage that CTPVI would recover, but given these estimates of 3%, minus the unidentified motorists, minus the motorists who refuse to comply after CTPVI is instituted, it is quite feasible for this number to be very small indeed. The likelihood of the problem in question even occurring is small, and the likelihood of the proposed solution being able to cure the problem is even smaller. SWATTING A NAT WITH A SLEDGEHAMMER And yet the solution proposes to force the entire country to purchase insurance.    It increases the insurance companies customer base by a whopping 33%!    In aggregate, it takes more money away from New Zealanders and puts it into the pockets of insurance companies. I believe that the current state of affairs is very good, and while drivers do incur some risk if they do not buy insurance that covers them from the uninsured motorist who cannot or does not pay, the expected cost magnitude of that risk is very small, and furthermore drivers can insure against it by paying for uninsured motorist coverage (UME). INSURANCE PRICES WILL RISE There is an implication in the leading arguments of the paper that if insurance companies are able to collect premiums from these otherwise uninsured drivers, they will be able to reduce rates by 6.9 to 11 percent for the insured drivers.      But this implication is facetious. It is facetious in part due to the already discussed overestimate of this figure by the insurance industry.    It is facetious due to the lack of accounting for the proportion of drivers who are not identified, and thus cannot be recovered from in any case.    Additionally, there will still be a large proportion of drivers who operate illegally, who cannot be recovered from if the scheme were to go into place.      In a best case scenario, neglecting factors that will be discussed in forthcoming paragraphs, premiums would go down by significantly less than 3% percent. But what is much more relevant is that, when customers are denied the choice of not purchasing an insurance product, the industry is free to raise prices to any level that they see fit, with no checks and balances. PRICE SIGNALS and CUSTOMER CHOICE Insurance is a product.    It is offered by a business, and it is bought and paid for by the customers of that business. In all market situations, where price and quality are of issue, customer choice is imperative.    The choice to buy a service elsewhere is a constant threat that maintains the quality of businesses.    The choice to forgo purchase of the service entirely is another threat that keeps prices reasonable. The general price level is normally set by the market, by customers at the margin choosing not to purchase a product if the price is too high. Businesses alter their prices to maximise revenues.    Higher prices bring in more revenues than lower prices. But there is a price point beyond which the loss in sales volume decreases revenues.    That is what keeps prices in check. However, for any product which is compulsory, no price is too high.    Every increase in price increases revenues, to no limit, as the customers are legally forbidden from opting out of the scheme, and from thus sending a market price signal indicating that prices have overshot. INABILITY TO REGULATE WITHOUT PRICE SIGNALS Customer choice is imperative.    Without customer choice, there can be no price signals.    Without price signals, no one can know whether prices charged for a product or service (third party insurance in this case) are reasonable or not. A government regulator could attempt to make such a determination, but without price signals, regulation becomes less and less economics, and more and more guesswork.    A regulator in charge of controlling the costs of insurance would have no way to know if their cost controls are sufficient to subdue untoward expenses, or alternatively if they are overbearing and choking a legitimately priced service.    Regulators could consider free markets elsewhere, historical pricing, and the state of the economy.    However, the factors involved in market pricing are extremely numerous and profoundly complex, unpredictable, and widely variable.    Furthermore, they are reactive, function to keep supply and demand in balance, maximize efficiencies, and operate in a distributed real-time way with little overhead and aggregating more present knowledge than any person's intuition could ever hope to grasp. A regulator is an extremely poor substitute for a market. RISK ESTIMATION AND THE CULTURE OF FEAR Humans are notoriously bad at estimating probabilities.    Studies have shown that humans overestimate the likelihood of low probability events: "Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling." [1]    Other studies have shown that humans overestimate the likelihood of events that are easy to visualize occurring, such as car accidents.    Individuals have a low breadth of experience and must rely on studies, adverts, or claims of fact made by the insurance industry which has a financial bias to estimate facts in their favor.    The current climate of fear in government advertising helps people to visualize crashes, and exacerbates the over-estimate of the likelihood of such events occurring. As a result, people tend to pay more for insurance products than what would otherwise be considered logical and rational, even at the free market price. The insurance industry gladly takes advantage of these human weaknesses. It appears that the government is helping them along in numerous ways, and is now suggesting more ways to do that. Any CTPVI scheme would not only perpetuate this abuse, it would condone it, and exacerbate it. LEGITMATE ARGUMENTS FOR OPTING OUT There are a number of legitimate arguments for opting out. A LOSING GAMBLE: Primarily among these is the valid alternative minority viewpoint that insurance is a losing gamble.      Insurance is akin to gambling.      Going in, you know that the odds are against you, just like at the craps table, or at the pokie machines.    As a result, insurance companies are able to take in profits, in aggregate.    Just like in gambling, some players win but most players loose. There is no way to test if this viewpoint is any more or less valid than the majority viewpoint that insurance is a useful product.    In fact these are normative concepts, tied in highly with a person's individual value system, and have no way of being tested. RELIGIOUS BELIEF:    Among the Muslim community, insurance is viewed as gambling, and is forbidden: "It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.    Conventional insurance involves the elements of uncertainty (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah." [2] IMMIGRANTS:    Immigrants may have impeccable driving safety records.    However, these are unlikely to be demonstrable to insurance providers.    Thus, immigrants are often charged rates much in excess of what the risk profile and market rates would otherwise suggest.    As such, an immigrant's alternative choice of opting out becomes more desirable. LOW RISK AVERSION: Some people simply have a high tolerance for risk.    This would be especially true among males, as well as among single people who have no partner or dependents.    These people have less incentive to purchase risk mitigation products. Stoic persons and persons of Buddhist persuasion also have less (perhaps no) incentive to purchase insurance.    These philosophies do not consider events to be good or bad, but simply to be, and to be relished and appreciated for whatever innate qualities they have.    These philosophies see everything as ok, but the desire to avoid bad situations, being an internal part of self, as the true evil to be overcome. FINANCIAL HARDSHIP: Those persons experiencing some level of financial hardship, who must make sacrifices, are less likely to purchase insurance.    These people would find their situation worsened by CTPVI. HIGH TOLERANCE FOR CONFRONTATION: The majority of New Zealanders have a low tolerance for confrontation and would prefer for the insurance company to deal with the recovery process.    The insurance industry receives a profit for taking on the business of seeking damages. But some individuals with a higher tolerance for confrontation legitimately prefer to keep this business for themselves. PERVERSE INCENTIVES The institution of a CTPVI scheme would create a perverse incentive. At present, uninsured motorists know they are personally liable for all the damage they may cause.    As such they drive relatively carefully (controlling for various other factors). Under an insurance scheme, motorists know that if they get into an accident, insurance will cover the costs, whether their own, or the other parties, or some combination.    Certainly rates would increase, however, increased rates is much less of an incentive than having to pay the full cost out of pocket. Thus persons will have less of an incentive to drive carefully. HOLDING LIABLE PARTIES LIABLE I fully support holding liable parties liable.    It sends the correct signals and maintains the correct incentives.    It is fair and just. I suggest that, rather than obfuscate and complicate the insurance situation in New Zealand with a CTPVI, the legal system methods for recovery from liable parties be enhanced. One method of recovery could be made via the granting of a lien against an offender's vehicle, and the impounding of said vehicle until the lien is paid. Other methods may be available, and I am in favor of more discovery and consideration of possible methods of recovery. BONDING The public incentive for CTPVI seems to stem from a desire to hold liable parties to account. For individuals with legitimate personal reasons for not purchasing insurance, but who are able and willing to cover damages (the self-insured), the question of ability and willingness to cover damages can be resolved in an alternate way: that of bonding. In other jurisdictions, bonding is one solution.    If a driver puts up a bond to ensure that they have sufficient means of covering liability, they are not required to participate in an insurance scheme that they may find is priced inadequately for their situation. Should the Ministry move towards a CTPVI scheme, I should highly recommend that drivers are given the option of being bonded, rather than insured.    The issue at hand is ensuring that every driver is capable of paying for damages, should they occur.    Having insurance is only one means of demonstrating this capability.    Having a bond registered with LTNZ or elsewhere, would be another perfectly valid way of ensuring one is capable of making payment.    Bonds may be preferred by fleet drivers.    They also offer up another form of choice, which may help send some price signals that would otherwise be invisible. DISPUTED CLAIMS I would like to dispute several claims made in the discussion paper. "Currently, 75 percent of vehicle owners (those who are insured) are paying through their premiums for the costs incurred by all vehicle owners" Firstly, these costs are not incurred by all vehicle owners.    They are incurred only by at-fault drivers who do not cover damages that they are liable for.    Responsible persons who pay for damages they incur are not bringing any costs to the table whatsoever. Secondly, the payment of these costs is not being made by all 75% of motorists who choose to insure, but by those persons who choose to elect the UME coverage.    UME coverage matches the damage that is not recoverable by uninsured motorists.    By avoiding the UME coverage, insurance customers can avoid these costs, and they can do this today with no new regulation required. Persons choosing to pay for another persons' liabilities by purchasing the UME are in effect buying double coverage.    They are already covered by the liable party through the justice system via the Disputes Tribunal or the courts, admitting for a certain small level of risk that they will not be able to recover their damages.    Rather than being 100% covered through the justice system, they are 97% covered through it. When additionally covered by uninsured motorist coverage, drivers are 189% to 193.1% covered.    However this coverage is not additive; there is no double indemnity.    Rather it is overlapping.    Victims cannot claim the same damages though the legal system AND the insurance company. Buying this overlapping coverage from an insurance company is a means to protect against the possibility of being unable to recover, as well as the bother of trying.    It is a reasonable product only for those who are especially risk-averse, or especially fear confrontation and wish to avoid the trouble of legal recourse. Therefore, the claim that 75 percent of vehicle owners are paying for these costs is spurious, as only the most risk-averse among the insured are willing to purchase this double coverage. A small minority of people are failing to pay for damages they incur.    A much larger minority (though you claim 75% majority) of people are choosing to be doubly-covered for the liabilities of others, and these people need to accept and take responsibility for that choice. It makes little sense for government policy to assure that people are doubly covered for uninsured motorist damage to their property. ------ [1] Daniel Khaneman, Paul Slovic, and Amos Tversky (eds.), Judgement under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982). [2] http://www.islamic-banking.com/insurance/index.php