Embrace forced car insurance
Thus there is no economic logic in buying third-party insurance when the cost is greater than the benefit to the purchaser.
Governments force people to purchase third-party liability insurance for their motor vehicles because there is a ‘market failure’ in the insurance market; without a mandatory policy very few people would insure.
A market failure usually occurs when the social benefit of a transaction is significantly greater than the private benefit while the social cost and private costs are nearly equal. If we remove the mandatory policy to purchase insurance, most people will not–because the private benefit of doing so is less than the private cost (the premium or money paid).
In the likely event of an accident, it is the other vehicle, not the one which is insured, that benefits from the third-party insurance. Thus there is no economic logic in buying third-party insurance when the cost is greater than the benefit to the purchaser.
When an accident occurs involving an uninsured vehicle, apart from the private damage on the vehicles and possible loss of life, the two vehicles will also be incapacitated for a longer period. As the owners look for money to repair their vehicles, there will be an extra loss in terms of the opportunity cost of having the cars operating; for example, tax payments and transportation efficiency.
Therefore, the benefits to society for third-party liability insurance are greater than the cost (the private cost, since the private individual is part of society, plus any cost of enforcing the policy).
From the government’s perspective, it makes sense to force people to purchase third-party liability insurance since the social benefits are greater than the social costs. The only viable solution is to enforce a mandatory policy on individuals since their economic decision, though logical and maximising their self-interest, is not likely to maximise society’s.
Mr Maranga, financial economist, is a PhD student at JKUAT. [email protected].
