Research & Commentary: Auto Insurance Mandates and Minimum Rate Regulation

Published July 15, 2013

Individual mandates are commonly applied to auto insurance: Forty-nine states and the District of Columbia currently require that drivers carry at least liability auto insurance.

Despite compulsory auto insurance mandates being in place in nearly every state, the number of uninsured drivers is not improving and has even begun to climb during the recent recession, with many financially burdened families beginning to allow their coverage to expire without renewing.  

Insurance mandates attempt to address the “free rider” problem. Some consumers who drive without insurance and get into accidents cannot afford to pay for the damages they’ve caused; some patients who receive health care while uninsured can’t pay their bills. Paying customers must pay more for auto insurance in order to subsidize the costs of the free riders.

According to the Insurance Information Institute, around 14 percent of all drivers drive without insurance. The problem has become increasingly costly for both insurers and consumers: The National Association of Insurance Commissioners estimates that in 2007 uninsured drivers cost insured drivers around $10.8 billion.

Mandating at least a minimum level of coverage is intended to solve this problem by increasing the pool of insured motorists, but experience has shown mandates are difficult to enforce in a real-world setting. Drivers choose not to purchase auto insurance despite the mandates for several reasons. For some drivers the initial cost of insurance may be too high or the accrued costs from past accidents or traffic violations may make premiums too expensive. It is exceedingly difficult to track offenders and enforce the mandate, so many drivers continue to evade the law.

The argument over auto insurance mandates in most states has primarily revolved around the size of the mandate. Legislators have long debated whether the government should mandate a lower minimum level of financial responsibility or require people to buy as much coverage as possible. In recent years, states like Ohio and Wisconsin have increased their mandatory minimums (Wisconsin later reversed this hike); Illinois is now considering a similar hike, its first since 1989.

When minimum coverage becomes too broad and expensive, drivers will choose to go without insurance, regardless of what the law requires.  The mandates will have the opposite effect of what was originally intended. States with higher auto insurance mandates should consider reforms that bring them back down to a reasonable level. Keeping the mandated minimums low and keeping the decision on how much coverage to buy in the hands of consumers is a better way to encourage drivers to buy new auto insurance coverage.

The following literature examines auto insurance mandates and minimum rate regulation from multiple perspectives.

Ten Principles of Property and Casualty Insurance Regulation
Most insurance decisions – especially the price charged for insurance products – should be determined by market forces and voluntary arrangements. The benefits of doing this are clear: States with more open and free regulatory environments provide more insurance choices to consumers and more insurance jobs. A free and open insurance environment makes sense. In this booklet in The Heartland Institute’s Legislative Principles series, Matthew Glans and Eli Lehrer describe the core principles behind building a solid state insurance market.

Compulsory Auto/Uninsured Motorists
The Insurance Information Institute examines the current status of compulsory auto insurance across the country, reviewing recent developments and the issue in depth.

PCI: Mandatory Auto Insurance Doesn’t Reduce Number of Uninsured Drivers
This article discusses the effectiveness of individual mandate laws and the expensive systems needed to track and stop offenders. Insurer advocacy groups like Property Casualty Insurers Association of America (PCI) say mandates may not be the solution to the uninsured problem.

Capitol Comment 206 – Rethinking Compulsory Auto Insurance Liability Laws
This article from FreedomWorks examines the necessity and effectiveness of individual auto insurance mandates, warning about the effect of mandates on the overall health of a state’s insurance market.

Lower-income Households and the Auto Insurance Marketplace: Challenges and Opportunities
This paper from the Consumer Federation of America attempts to summarize what is known about low- and moderate-income (LMI) household participation in auto insurance markets. The paper also identifies and discusses key policy issues related to need, access, and equity. The paper recommends lowering minimum liability limits. “These state liability requirements do not directly benefit the many LMI drivers who are effectively judgment-proof.  They protect only other drivers – many of whom carry uninsured motorist coverage required by many states – who suffer damages caused by the LMI drivers.  Lowering these limits to those in Florida or California, for example, would lower premiums and allow more LMI households to purchase and obey the law.  Efforts to raise these limits, as have occurred in several states recently, should be questioned.”

Bill Would Require $25,000 in Car Insurance Liability Coverage
Becky Yerak of the Chicago Tribune covers Illinois’ proposed auto insurance minimum increase and speaks with several groups about their reactions to the hikes, the state’s first since 1989.

The Effect of Automobile Insurance and Accident Liability Laws on Traffic Fatalities
This paper by Alma Cohen and Rajeev Dehejia investigates the incentive effects of automobile insurance, compulsory insurance laws, and no-fault liability laws on driver behavior and traffic fatalities. Overall, their results indicate that, whatever other benefits they might produce, increases in the incidence of automobile insurance and moves to no-fault liability systems have significant negative effects on traffic fatalities.

Motorists May Feel Pinch from Higher Minimum Coverage Requirements
Rick Rouan of Columbus Business First discusses Ohio’s auto insurance mandate increase and the possible effects. Rouan contends auto insurance premiums likely will climb this year for Ohioans holding minimum coverage policies when the state’s financial responsibility benchmarks jump for the first time since 1969.

Research & Commentary: Wisconsin Auto Insurance Mandates and Minimum Rate Hikes
Matthew Glans examines Wisconsin’s 2009 auto insurance minimum hike and how it affected Wisconsin drivers.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance and Insurance News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].