Docstoc

Solutions to Questions and Problems in Chapter 14

Document Sample
Solutions to Questions and Problems in Chapter 14 Powered By Docstoc
					                                         Chapter 13
                            Solutions to Questions and Problems


1.   Underinsured motorist insurance covers losses that an individual personally suffers that
     are not compensated by an at-fault driver because the at-fault driver has too little
     insurance coverage. Many people would prefer not to purchase insurance for non-
     economic losses suffered as a result of an accident and therefore they would not purchase
     underinsured motorist coverage with high limits. In contrast, liability insurance covers
     the losses that a driver incurs as a result of being at-fault. The injured party may very
     well seek non-economic damages in such a case. Therefore, to protect his or her assets
     from being paid to compensate injured parties, a rational person might purchase liability
     insurance with limits in excess of the limits on uninsured motorist coverage. In sum,
     uninsured motorist coverage limits reflect the amount of coverage that an individual
     personally would like to purchase, whereas, liability insurance limits reflect the amount
     of coverage that other parties will seek following accidents (and the amount of wealth
     that the person has to protect).

2.   Underinsured and uninsured motorist coverage might be improved by eliminating any
     mandatory coverage for pain and suffering. Many people would prefer not to purchase
     insurance against non-economic losses and thus the mandatory coverage forces some
     people to purchase insurance they do not desire.

3.   The main rating factors are driving record, location of residence (territory), and
     characteristics of the driver, such as age and gender.

4.   It might be better to have a lower deductible for other-than-collision coverage than for
     collision coverage, because collision coverage is likely to be susceptible to more moral
     hazard. That is, losses from collision coverage are likely to depend more on the driver’s
     behavior than other-than-collision. As a result, the effect of a lower deductible on the
     premium charged is likely to be greater for collision than for other-than-collision
     coverage.

5.   Such a guaranteed renewable policy would likely have a very high price, because of the
     adverse effect a constant premium would have on the insured’s behavior. Most people
     would prefer a policy that provided greater incentives for safety and thus lower
     premiums.

6.   Insurers will be willing to sell coverage provided they can cover their costs, including
     their cost of capital. Consequently, the people that are insured in residual markets are
     typically people who have higher expected costs than the premium that insurers are
     allowed to charge. Not surprisingly, residual markets typically lose money.

7.   People who violate compulsory insurance laws and drive without insurance may have
     greater incentives to avoid accidents so as not to incur the penalties associated with
     violating the compulsory insurance law.

8.   Repeal of compulsory liability insurance and limits on tort liability would likely decrease
     drivers’ incentives for safety. The government could counteract this effect by increasing
     fines for traffic violations and accidents and by increasing enforcement efforts.


                                             26
9(a)   The argument for compulsory auto liability insurance is that it forces people who
       otherwise would drive without insurance to internalize (consider) the expected accident
       cost that they impose on others as a result of their decision to drive. Since some of the
       expected costs of driving are paid by others, some people might drive even though the
       total expected cost of driving exceeds their benefit from driving. Also, to the extent that
       future premiums depend on a person’s driving record, compulsory liability insurance can
       encourage greater safety from those who otherwise would drive without insurance.

9(b)   The main argument against compulsory auto liability insurance is that it forces poor
       people (who are the ones most likely to drive without insurance) to purchase insurance
       that primarily benefits other people.

9(a)   The argument for compulsory PIP coverage is that it forces people who otherwise would
       drive without such insurance to internalize (consider) their expected medical costs as a
       result of their decision to drive. Without PIP coverage or other medical expense
       coverage, a person seriously injured in an accident (without a third party at fault) would
       receive medical care that would be paid by others. Since some of the expected costs of
       driving are paid by others, some people might drive even though the total expected cost
       of driving exceeds their benefit from driving. Also, to the extent that future PIP
       premiums depend on a person’s driving record, compulsory PIP coverage could
       encourage greater safety from those who otherwise would drive without medical expense
       coverage.

9(b)   The argument against mandatory PIP coverage is that it forces poor people to purchase
       insurance that they do not desire.

10.    This is a difficult question given the complexity of actual no-fault laws and their effects
       on litigation costs and limits on compensation for pain and suffering, reductions in which
       could benefit both high and low risk drivers. To illustrate the effects ignoring litigation
       costs and pain and suffering compensation, restrictions on tort liability without
       mandatory PIP coverage would likely benefit high risk drivers more than low risk drivers
       because the limits on liability would reduce the extent to which high risk drivers have to
       pay the costs that they impose on low-risk drivers. Low risk drivers would have to pay
       more of the accidents cost caused by high-risk drivers. Mandatory PIP coverage would
       mitigate these effects somewhat as high-risk drivers would be required to purchase and
       have to pay higher prices for PIP coverage.

11.    Personal injury lawyers benefit from lawsuits and therefore generally would be hurt by
       the limitations on legal liability of no-fault laws. To the extent that legislators are still
       practicing law or plan to practice law after their term in office, voting on no-fault
       legislation could represent a conflict of interest.




                                                 27

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:5
posted:2/21/2012
language:English
pages:2