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No-Fault Insurance Trends

The No-Fault Auto Insurance system is under stress due to rising fraud and abuse that is responsible for higher insurance premiums. The cost to insurers to cover costs associated with rampant no-fault fraud is rising by 70 percent each year, and these costs will eventually be passed along to drivers.

Staged accidents, excessive or unnecessary medical treatment and inflated or questionable claims are driving up the cost of insurance. Both the severity and frequency of automobile personal injury claims are rising at an alarming rate, at a time when the number of traffic crashes has been trending down.

There are 12 states, along with Puerto Rico, that have a no-fault law. The first party (policyholder) benefit coverage is known as personal injury protection (PIP), so the terms “no-fault” and “PIP coverage” are used interchangeably to denote any auto insurance program that allows policyholders to recover financial loss from their own insurer. PIP is coverage that pays for medical care and other benefits if the policyholder has an auto accident.

The PIP law is designed to help reduce the need for people to sue to cover the cost of injuries resulting from automobile accidents. But the minimum requirement for PIP coverage often becomes a “dollar target” for medical expenses by those who take advantage of the system.

Several states have growing problems in their no-fault systems. Insurance companies analyze their own claims history and use that information to determine the premium rates necessary to cover future losses. The average severity (size of a loss) in 2006 was $6,344. By the third quarter of 2010, the average severity of a no-fault claim was $7,847. Insurers also look at claims frequency, which is the number of times a loss occurs. This is also a factor used in calculating premium rates.

The combined impact of rising frequency and severity of claims is driving up the cost of pure premium, which is defined as the premium needed to pay for anticipated losses without considering other costs of doing business. The only reasonable explanation for this dramatic rise: no-fault fraud and abuse.

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