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How does my state know if I have car insurance?

By Jim Sloan on June 3rd, 2010
Auto Insurance

How does my state know if I have car insurance?

Although all states in the U.S., with the exception of New Hampshire, require drivers to carry auto insurance, about 15 percent of the nation's drivers operate their vehicles without coverage.

As a result, those who have coverage pay higher premiums in order to cover the losses incurred when they are hit by an uninsured driver. States also spend millions trying to track down uninsured motorists and force them to buy insurance, and this in turn costs taxpayers even more.

The Insurance Information Institute (III) reports that mandatory insurance laws haven't reduced the number of uninsured drivers. In fact, there are signs that the proportion of uninsured motorists, which declined in recent years, may climb to 18 percent in 2010.

How do states try to monitor who's uninsured?

Over the years states have used a variety of methods to find uninsured motorists, including:

  • Requiring insurance carriers to file a monthly report with the state, so that the state can check their vehicle registrations against it. According to Loren McGlade, chairman of the Insurance Industry Committee on Motor Vehicle Administration, this system is rife with errors because name and address changes and long, complicated VIN numbers make it difficult for states to match their records against the insurance companies'.
  • Requiring carriers to report all policies that have been cancelled, lapsed or that were not renewed. States use the information to follow up with potentially uninsured drivers.
  • Requiring insurance companies to provide the state each month with their entire "comprehensive database" or "book of business" of customers. States then compare the previous month's data with the new data to determine which names have been added or dropped from coverage. Then they compare data from company to company in order to eliminate people who merely switched insurance companies. People who don't show up on anyone's list will hear from the state after a 30 or 45-day lag to allow for any additional proof of insurance to show up.
  • Random sampling. This is where the state sends insurance companies a spreadsheet with about one-twelfth of the state's drivers on it and the insurance companies have to confirm that the person has insurance.

The cost to consumers

The insurance industry spends millions of dollars a year complying with all the state regulations, and because there are a variety of systems in different states, the insurance industry can't save money by implementing an industry-wide approach.

The costs are often borne by the consumer. According to McGlade's group, consumers--in addition to paying higher premiums to offset the costs of uninsured motorists--also pay higher fees and taxes to fund the government regulation of uninsured motorists.

What's more, many insured drivers are fined when they are mistakenly identified as uninsured, and the regulatory costs diminishes competition and gives consumers fewer choices for auto insurance.

Why people don't get auto insurance

Despite various attempts to find uninsured motorists, in some states as many as one in three drivers operates his vehicle without insurance. According to the Insurance Research Council (IRC), the five states with the highest uninsured driver estimates were:

  • New Mexico - 29 percent
  • Mississippi - 28 percent
  • Alabama - 26 percent
  • Oklahoma - 24 percent
  • Florida - 23 percent

Some drivers go without car insurance because they can't afford it. The 2008 edition of the IRC study, Uninsured Motorists, found a correlation between the unemployment rate and the percentage of uninsured motorists. In fact, the III estimates, using information from the IRC and Blue Chip Economic Indicators, the uninsured motorist rate to climb to 18 percent in 2010.

Other drivers can't afford insurance because they've had too many accidents or serious traffic violations, which causes their premiums to be too high. Some, McGlade notes, "believe society owes them" and resent having to carry government-mandated auto insurance.

In some cases, drivers go without insurance because the odds are good that they won't get caught. The penalties for driving without insurance are not severe enough to persuade them to buy coverage. Your license can be suspended for driving without auto insurance, but even that doesn't stop some motorists from getting on the road without coverage.

"Unless the odds of getting caught are high and the penalties severe," the III says, "drivers will continue to flout the law."

McGlade agreed that states struggle with how to enforce uninsured motorists laws. He noted that many people who lose their licenses also lose their jobs, and that only makes the odds more likely that they won't be able to afford insurance when they start driving again.

"One lawmaker suggested that we impound all the cars of uninsured motorists," McGlade said. "I pointed out that there are 33 million vehicles in California and 25 percent of the drivers are uninsured. Where are you going to store all those impounded cars? He said he hadn't thought about that."

Online verification

Frustrated by the different systems in use, the insurance industry has been pushing for an online verification system where a driver's insurance coverage can be checked by authorities immediately when the need arises--such as at the scene of an accident or a traffic infraction. The system would work like a credit card verification system.

According to McGlade, seven states are pilot testing the online system, four states have implemented it and another four or five are considering trying the new system. Insurance industry representatives will be happy to see those numbers grow.

"The online verification system is the least invasive to the insurance industry and allows them to keep their data behind a firewall," McGlade said. "It's a much better situation."

McGlade said the insurance industry hopes an online verification system can be in place throughout the country within 10 years. The problem, he said, will be convincing states that already have a good--albeit costly--system in place to make the change.

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