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GG 24
Use a Database to Reduce the State’s Number of Uninsured Motorists

Summary

An estimated 20 percent or more of all motorists in Texas drive without insurance. The Texas Department of Public Safety could reduce the number of uninsured drivers by creating a database to identify uninsured vehicles and cancel their registrations if their owners do not obtain and maintain insurance coverage. This measure would increase state revenue and protect Texans against accidents with uninsured motorists.

Background

Texas has required drivers to be insured since 1981, and yet uninsured motorists still are far too common on the state’s highways.[1] Officer A. N. Taylor of Houston recently stated, “I investigated a five-car accident where none of the drivers had proof of liability insurance. It is not uncommon for us to investigate multiple car accidents where none of the drivers have insurance.”[2]

State law requires car owners to show proof of insurance when they renew their registration and when they have their vehicle inspected, both annually.[3] State law also requires the Texas Department of Public Safety (DPS) to obtain proof of insurance from persons applying for drivers’ licenses and authorizes the department to require it at renewal.[4] (The state now provides online renewal of drivers’ licenses, however, and no proof of insurance is required in these electronic transactions.)

Even when drivers show proof of insurance, the insurance coverage may be only temporary. Some drivers purchase policies to obtain registration and inspection stickers or driver’s licenses, and then allow them to expire or cancel them soon after the transaction. Police ask for proof of insurance when they stop drivers for traffic violations or accidents, but at present they cannot verify the validity of an insurance card on the spot.

It is difficult to estimate the number of uninsured vehicles in any state, and Texas has no verifiable statistics.[5] In 2002, the Texas Department of Insurance (TDI) matched the number of vehicles covered by policies in 2001 with the number of Texas vehicle registrations and estimated that 23.7 percent of the vehicles were uninsured. Some motorists, however, drive vehicles with expired registrations or none at all.[6] In 2002, the Texas Department of Public Safety (DPS) estimated that 25 percent of vehicles in Texas were uninsured.[7] The Automobile Insurance Agents of Texas believe the percentage of uninsured drivers in Texas is closer to 30 percent.[8] Figures provided by police departments across Texas show that the problem is much greater in some cities than others, and TDI statistics show wide variation among counties.

The insurance industry contends that uninsured motorists are involved in accidents more frequently than insured drivers and that these accidents tend to be more costly. A study of California drivers lends some support to this view.[9] The study attempted to assess whether uninsured drivers in Texas tend to be in more accidents, but the data maintained by the Texas DPS were inconclusive.

Those who drive without insurance often cannot afford to pay for damages if they have an accident. In many cases, the damage done by uninsured motorists to other drivers’ vehicles is never reimbursed, though in some cases, uninsured motorist insurance or collision insurance will cover such damage. This type of insurance drives up costs for insured motorists, though. Recently, insurers raised the rates for the uninsured motorist portions of Texas auto insurance by 23.5 percent, a bigger increase than in any other category.[10]

If an accident victim requires hospitalization and is poor, the hospital often relies on Medicaid for reimbursement. Medicaid recipients are involved in about 2,000 auto accidents a month in Texas, and about 85 percent of recipients are not covered by insurance, either because they were driving without insurance or because they were hit by uninsured motorists.[11] TDI reports that in 2000, insurance companies’ average payment for accident victims’ medical expenses was more than $6,100.[12] Based on that figure, the annual amount of additional medical spending resulting from the medical costs of uninsured victims can be estimated at $124 million, with Medicaid paying about half of that and medical providers absorbing the rest.

Insurance databases

To combat the problem of uninsured vehicles, some states have developed databases to verify liability insurance. A database that can match insurance coverage with motor vehicle registration records, coupled with effective enforcement and meaningful penalties, can reduce the number of uninsured vehicles significantly. Utah reduced its percentage of uninsured motor vehicles from 23 percent in 1995 to 9 percent in 1999.[13] Nevada reduced its percentage from 25 percent in 1993 to 5 percent in 1996.[14] Even though its program did not involve enhanced enforcement, Colorado found that its database reduced its percentage of uninsured motor vehicles from 33 percent in 1998 to 14 percent in 2002.[15]

States with motor vehicle insurance databases include Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Kentucky, Louisiana, Massachusetts, Missouri, Nevada, New Jersey, New Mexico, New York, Oregon, Pennsylvania, South Carolina, Utah and Virginia.[16]

Some of these states require insurance companies doing business in the state to submit electronically their entire “book” of insurance, that is, a complete list of all policies issued and outstanding; others require companies to provide information only on new policies, terminations and lapses or policy changes. Some states continually match insurance policies with vehicle registrations, while others conduct only random sampling.[17]

Nevada: Before Nevada began requiring liability insurance in the 1970s, it estimated its percentage of uninsured drivers at about 40 to 50 percent.[18] In 1993, Nevada enacted a law that mandated the creation of an insurance database. At the time, the percentage of uninsured motorists in Nevada was unknown, but one estimate was 25 percent.[19] By 1996, a study by the Nevada Department of Motor Vehicles showed that 94.6 percent of all drivers in the state were insured.[20]

Nevada law requires every automobile insurer in the state to provide the state’s Department of Motor Vehicles with a monthly record of each policy issued, amended or terminated in the previous month.[21] The law requires the department to compare the records of current motor vehicle registrations with its records of motor vehicle policies and to mail notices to owners of uninsured vehicles.[22] The department must send the owner by first-class mail a form requesting information about any insurance the owner may have. The owner must return the form to the department within 20 days. If the department receives no response, it must send by certified mail a second form that the owner must return within 15 days. If the owner returns neither form, or if the department is unable to verify the information stated in the forms, or if the owner admits having no insurance for the vehicle on the forms, the department must suspend the vehicle’s registration.[23] The owner must pay a $250 fee before the department will reinstate the registration.[24]

Revenue from the reinstatement exceeded the expenses of operating the state’s database and verification system by $3 million. The state’s insurance premium tax collections increased, and the financial situation for hospitals, health care providers and those who previously bore the burden of uncompensated damage from uninsured motorists improved, leading to a total positive economic impact on Nevada, a state with one-tenth the population of Texas, of an estimated $30 million a year.[25]

Utah: A private vendor maintains the Utah database. Insurance companies report all transactions monthly to this database, while the Utah Department of Motor Vehicles (DMV) reports registrations each month. The database matches this information and sends two sets of notices to owners of uninsured vehicles. The vendor notifies the DMV of owners who do not acquire insurance, and the DMV cancels registrations for those vehicles. Persons who wish to re-register their vehicles must pay a reinstatement fee, any property taxes due on the vehicle, and a registration fee.[26] All owners of registered vehicles pay a $1 fee per year with their motor vehicle registration to fund the program.

According to private vendor data, Utah reduced its percentage of uninsured motorists from 23 percent in July 1995 to 9.3 percent as of May 1999.[27] The Utah State Tax Commission reports that the database also has helped to identify 90,000 Utah vehicles that may be improperly registered in other states.[28] Such vehicles also may owe state motor vehicle sales taxes.

Recommendations

A. State law should be amended to require the Texas Department of Public Safety to maintain an uninsured motorist identification database.

The state would contract with a vendor to construct and maintain the database, and would compensate the vendor for startup and operating costs from Fund 6, the fund for revenue dedicated to highway construction and law enforcement. The state also would receive revenues from reinstatement penalties and additional insurance premium taxes from the increased number of insurance policies written in the state. The new law should require that the vendor match insurance policies with vehicle registrations and mail warnings of imminent cancellation to owners of uninsured vehicles. The Texas Department of Transportation would cancel registrations for those who fail to obtain insurance or notify the state. The law should impose a reinstatement penalty of $250 for re-registering any vehicle that had had its registration cancelled for failure to maintain insurance. The reinstatement penalty would serve to balance against the financial advantage the owner of the uninsured vehicle is attempting to obtain by not purchasing insurance. The driver also would be required to pay the motor vehicle registration fee that applies to the vehicle, even if it has already been paid in the last 12 months. The law should provide that the Council on Competitive Government select the vendor and award the contract by December 31, 2003, so that the program will begin operation by July 1, 2004.

B. A special study committee or commission should be appointed to investigate the factors that determine automobile insurance rates, particularly liability insurance, within the state of Texas, with a view to making such insurance more affordable, and report its findings to the Legislature, the Texas Department of Insurance, the Texas Department of Public Safety, and the Texas Department of Transportation by the beginning of the 2005 legislative session.

Fiscal Impact

An uninsured motorist identification database would increase state revenue. Increased premium tax collections would add revenue to the General Revenue Fund and the Foundation School Fund, and reinstatement penalties for vehicle registrations would add revenue to the General Revenue Fund. The gains in revenues to the Foundation School Fund would reduce the need for appropriations from General Revenue for the same purposes by exactly equal amounts and would therefore yield savings to General Revenue. In addition to reinstatement penalties, owners of cancelled vehicles would have to re-pay the registration fee, meaning increased revenue to Fund 6, the state’s highway construction and law enforcement fund.

A private vendor would pay startup program costs for the database and would be compensated from Fund 6, which will be replenished from the second payments of registration fees at least partially. Revenue from the 1.6 percent premium tax assessed on auto liability policies would go to the General Revenue Fund and the Foundation School Fund. The largest increases in General Revenue would come from the $250 reinstatement penalty. In addition, the State’s Medicaid budget would realize modest savings since more car accident victims’ injuries would be paid for by insurance instead of Medicaid.

Premium tax revenue

The premium tax is a tax imposed by state law on insurance policies sold in the state. The Texas premium tax rate on auto insurance is 1.6 percent. The estimate assumes that insurance companies would sell 249,540 more policies from July to December 2004 than without the database. With the average cost of policies estimated at $200 twice a year, premium tax collections would increase by $799,000. Insurance companies would pay taxes accrued in 2004 in March 2005.

Of the vehicle owners who obtain insurance as a result of the database, most would pay higher premiums than owners who have maintained insurance continuously. The average annual premium in Texas for standard or preferred policies in 2000 (the last year for which an average is available) was $388 annually. Most buyers who have not had auto insurance during the previous six months would be likely to purchase policies from “county mutual” insurance companies, rather than standard or preferred policies from rate-regulated companies. These drivers are considered more risky drivers simply because they have not maintained their insurance, and insurance company groups will not be willing to sell these owners standard or preferred policies from their rate-regulated companies, but would refer their business to their affiliated county mutual companies, whose rates are not regulated. Data from the Texas Department of Insurance’s (TDI’s) Auto Insurance Rate Guide suggest that the rates on county mutual policies usually are 20 percent to 50 percent more expensive than the standard or preferred rates of regulated companies.

TDI estimates the percentage of uninsured vehicles in Texas at about 21 percent to 25 percent. This estimate conservatively assumes a rate of 21 percent, and a drop in the percentage of uninsured vehicles from 21 percent to 15 percent over a two-year period beginning in July 2004, when the database begins operation. Fifteen percent is a conservative estimate compared to the 5 percent to 14 percent levels that some other states have reached. The estimate assumes an even rate of reduction in uninsured motorists over the two-year period.

Fiscal Year Increased Premium Tax Collections Allocation to General Revenue Allocation to Foundation School Fund
2004 $0 $0 $0
2005 $798,528 $598,896 $199,632
2006 $4,074,476 $3,055,857 $1,018,619
2007 $6,674,586 $5,005,940 $1,668,646
2008 $6,838,170 $5,128,628 $1,709,542

Reinstatement penalty

The Texas Department of Public Safety would collect a reinstatement penalty of $250 on each vehicle for which it cancels registration for failure to provide proof of insurance. Reinstatement penalty revenues would be directly proportionate to the number of mailings sent to people whose vehicles are identified as uninsured. The estimate assumes that 10 percent of people who receive initial notices would reinstate their vehicle registrations. For example, mailings of 60,000 per month, or 720,000 per year, would result in about 72,000 reinstatements, generating about $18 million per year. The volume of mail per month can be as large as the sponsoring agency desires, so long as the volume is manageable and reasonable in relation to the number of uninsured vehicles remaining. It is assumed that the volume of mail will increase as the program gets underway, but after two years of operation may decline as the prevalence of uninsured motor vehicles declines.

Fiscal Year First Letters Warning of Possible Cancellation and Reinstatement Penalties Mailed Vehicles Reinstated and Number of Penalties Collected Deposited in General Revenue from Penalties
2004 0 0 $0
2005 610,000 61,000 $15,250,000
2006 920,000 92,000 $23,000,000
2007 720,000 72,000 $18,000,000
2008 720,000 72,000 $18,000,000

Motor vehicle registration fees

Drivers who have their registration cancelled would be required to pay a new registration fee. The estimate assumes that the same people who pay the reinstatement fee would pay this registration fee a second time; therefore, the numbers used to calculate the aggregate payments are equal.

Medicaid

The Texas Health and Human Services Commission (HHSC) estimates that Texans eligible for Medicaid are involved in 2,000 automobile accidents a month and that 85 percent of the medical expenses resulting from these accidents are not covered by insurance of any kind.[29] TDI reports that the average cost of treating injuries sustained in accidents was more than $6,100 per person in 2000.[30] Medicaid, which includes general revenue and federal funds, reimburses medical care providers for 50 percent to 60 percent of such expenses. HHSC statistics indicate that these expenses may total about $62.2 million per year. If the state’s uninsured drivers had liability insurance, and 50 percent of accident expenses for Medicaid-eligible persons were covered by the liability insurance instead of Medicaid, the state would save more than $31 million annually in Medicaid spending. About $12.4 million of this amount would represent general revenue, with the remaining $18.7 million representing federal funding. The moderate reduction in uninsured motor vehicles that this estimate assumes would result in $518,000 in general revenue savings and $777,000 in federal funds savings over the next biennium.

Database expenses

Several states, including Connecticut, Colorado, New Mexico and Utah, contract with vendors to operate their databases. The vendors establish and operate the databases, receive data monthly on individual policies sold from insurance companies, match individual policies with motor vehicle registrations and send letters to the owners of vehicles that lack insurance. Some states compensate the vendor based on the total number of vehicles registered in the state. The estimate assumes that the vendor’s annual compensation per registered vehicle would be 36 cents. Vendors include the cost of the first letter sent to owners in this fee; they may require an additional charge for second letters, since they are sent by certified mail.

In addition, this estimate assumes that the state will spend reasonable sums—$500,000 the first year and $150,000 each year thereafter—on publicity for the database, including materials for local newspapers and television stations, to educate the public about the database and the consequences of remaining uninsured.

Year Database Operations Second Letter Mailings Publicity Total Annual Cost
2004 $998,160 $0 $0 $998,160
2005 $6,142,320 $1,155,000 $500,000 $7,797,320
2006 $6,295,680 $1,320,000 $150,000 $7,765,680
2007 $6,449,040 $1,080,000 $150,000 $7,679,040
2008 $6,602,400 $1,080,000 $150,000 $7,832,400


Fiscal Year Savings to General Revenue Gain to General Revenue Savings to Federal Funds Gain to Fund 6 Gain to County Funds, Including Road and Bridge Fund Gain to Foundation School Program Implementation Costs to Fund 6 Net Gain to General Revenue
2004 $12,000 $0 $18,000 $0 $0 $0 ($998,000) $12,000
2005 $706,000 $15,849,000 $759,000 $2,440,000 $1,818,000 $200,000 ($7,797,000) $16,555,000
2006 $2,496,000 $26,056,000 $2,216,000 $3,680,000 $1,840,000 $1,019,000 ($7,766,000) $28,551,000
2007 $3,453,000 $23,006,000 $2,675,000 $2,880,000 $1,440,000 $1,669,000 ($7,679,000) $26,459,000
2008 $3,494,000 $23,129,000 $2,675,000 $2,880,000 $1,440,000 $1,710,000 ($7,832,000) $26,622,000


Endnotes

[1]Act of May 30, 1981, 67th Leg., R.S. Ch. 800, 1981 Tex. Gen. Laws 3053, now codified at Tex. Transp. Code §§ 601.051 & 60.191 (1999).

[2]Automobile Insurance Agents of Texas, Uninsured Motor Vehicle Study (Austin, Texas, 2002), p. 7.

[3]Tex. Transp. Code §§502.153, 548.105 (1999 & 2002 Supp.).

[4] Tex. Transp. Code §521.143 (2002 Supp.).

[5] The American Association of Motor Vehicle Administrators, “Standardizing the Way We Measure the Uninsured Motor Vehicle Rate,” http://www.aamva.org/drivers/drvFRUninsuredMotoristsWG.asp (last visited July 21, 2002); and Resources for the Future, What We Know About Uninsured Motorists and How Well We Know What We Know, by J. Daniel Khazzoom (Washington, D.C., 1997, Rev. 2000).

[6] The number of vehicles driven without registration in Texas is unknown. A calculation of the number of uninsured vehicles in California estimated that 7.8 percent of all automobiles and 11.7 percent of all trucks in that state were driven without registration. Resources for the Future, What We Know About Uninsured Motorists and How Well We Know What We Know, p. 12.

[7]“Uninsured Motorists: Legislature Needs to Crack Down,” Dallas Morning News (April 30, 2002), p. 12A.

[8] Automobile Insurance Agents of Texas, Uninsured Motor Vehicle Study, p. 7.

[9] Data from California in 1988-1989 showed the uninsured motorists account for 55 to 60 percent of all fatal accidents, 45 percent of bodily injury accidents, and 34 percent of traffic citations, although at the time fewer than 28 percent of all California drivers were believed to be uninsured. Resources for the Future, What We Know About Uninsured Motorists and How Well We Know What We Know, pp. 23-24.

[10] Texas Department of Insurance, “Auto Benchmark Rates to Change,” Austin, Texas, November 2, 2001, http://www.tdi.state.tx.us/commish/nr11021a.html. (Last visited October 19, 2002.)

[11] E-mail communication from Terry Cottrell, analyst, Texas Health and Human Services Commission, May 24, 2002.

[12] Statistics provided by Gary Gola, statistician, Texas Department of Insurance.

[13] “New Era for Uninsured Motorists,” editorial, Desert News (July 28, 2000), p. A14.

[14] E-mail communication from Robert Feldman, president of Nevada General Insurance Co., February 13, 2002.

[15] E-mail communication from John McGuire, vice-president of Explore Information Services, July 31, 2002.

[16] Ariz Rev., §§28-4142,28-4142,28-4143 (2002) (adopted Laws 1997, Ch. 125 §6); Ark. Code., §27-22-107 (2001) (adopted Acts 1997, No. 991, § 4); Col. Rev. Stat, 42-7-601 (2001); Conn. Gen. Stat., §38a-343a (2001) (adopted P.A. 93-298, S. 2,11); Fla. Stat. §627.736 (2001); Ga. Code Ann., §40-5-71 (2001); Ky. Rev. Stat. Ann.§186A.040 (2001); La. Rev. Stat. Ann.32:863.2 (2002); Mass. Gen. Laws Ann. §9:34B; Mo. Rev. Stat, §303.409 (2001); Nev. Rev Stat., §485.314 (1) (1998); N. J. Stat. §17:33B-41 (2002); N. M. Stat. Ann., §66-5-205.1; N.Y. Veh. & Traf. Law §313 (2002); Or. Rev. Stat. §802.270 (2001); Pa. Cons. Stat., §1801; S.C. Code Ann. §56-10-40 (2001); Utah Code Ann., §41-12a-803 (2001); and Va. Code Ann. §46.2-706.1 (2002).

[17] “Attachments: American Charts,” in the Financial Responsibility and Insurance Committee of the American Association of Motor Vehicle Administrators, Resource Guide, p. 159 and following (2002). Available at http://www.aamva/drivers/drvFinResponsibilityResourceGuide.asp (last visited Nov. 4, 2002).

[18] Letter from Robert Feldman, president, Nevada General Insurance Co., May 22, 2002.

[19] Nevada State Assembly, Assembly Committee on Commerce, meeting minutes (May 10, 1993), http://www.leg.state.nv.us/67th/93minutes/A_CM_510.html. (Last visited October 19, 2002.)

[20] Stuart Eskenazi and Jeff South, “Drivers Skip Insurance with One-Month Policies,” Austin American-Statesman (August 4, 1996), p. A1.

[21] Nev. Rev. Stat., §485.314(1) (1998).

[22] Nev. Rev. Stat., §485.317(2) (1998).

[23] Nev. Rev. Stat., §485.317(4) (1998).

[24] Nev. Rev. Stat., §482.480(6) (1998).

[25] Letter from Robert Feldman.

[26] E-mail from Richard Kasteler, president of Insure-Rite, November 4, 2002.

[27] Insure-Rite Inc., “Executive Summary,” http://www.insure-rite.com/results.htm. (Last visited October 20, 2002.)

[28] Letter from W. Val Overton, chairman, and Rodney G. Merrelli, executive director, Utah State Tax Commission, to David H. Steele, senator, State of Utah, October 20, 1997.

[29] E-mail communication from Terry Cottrell.

[30] Statistics provided by Gary Gola.