Effects of No-Fault Auto Insurance on Safety Incentives

In order to examine how no-fault motor vehicle insurance affects accident rates, insurance regimes in various countries are compared. A random effects model on IRTAD fatality data of 29 countries for the years 2005 to 2010 reveals that some motor vehicle insurance systems increase moral hazard. The incentive to take care seems not to be negatively affected by no-fault rules, but by moral hazard due to limited experience rating. Restrictions on experience rating lower the level of care taken by motorists. A combination of no-fault insurance and flat-rate premiums, as found in New Zealand or the Northern Territory in Australia, has a detrimental effect on the safety of roads. As a result, the distinction of no-fault versus tort-based third-party liability regimes is not very meaningful for analysing the effects of insurance rules on accident rates. Rather, the specific mechanisms of insurance premiums are decisive for road safety