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Cost of Accidents
Road transportation is the backbone of trade, access to markets, education and health care. The worldwide number of road deaths is an unacceptable 1.24 million per year. Comprehensive road safety laws cover only 7% of the world’s population. Casualties from road accidents are invariably those who are in the lower classes of society. 518 Billion Dollars is the estimated cost of accidents worldwide.
Cost of accidents can be worked out in many ways. The ‘Gross Output’ or ‘human capital method’ entails costs to be divided into those that cause a diversion of current resources and those that lead to a loss of future output. The ‘willingness to pay’ method is predicated upon the value given to a road safety risk reduction, and the value is computed as the aggregated amount that people are willing to pay for it. The ‘net output’ method differs from the ‘human capital method in the fact that the discounted value of the victim’s future consumption is subtracted from the gross output figure. The ‘life insurance approach’ takes insurance values as the benchmark to arrive at values of victims’ lives. The ‘court award approach’ arrives as the value of life by averaging the sum awarded by courts to surviving dependents in accidents. The ‘implicit public sector valuation approach’ makes estimates based on implicit values set by state regulation and public policies.
While developed countries prefer the ‘willingness to pay’ method, developing countries adopt the ‘human capital method. The costs of accidents are accordingly worked out for Europe as 162 Billion Euros for Europe, 150 Billion Dollars for USA, and 16 Billion Egyptian Pounds for Egypt. Such high losses due to accidents could be substantially reduced if safety measures like seat belts, air bags and child safety seats were adopted ubiquitously.
Since the invention of the motorcar, the population of means of road transportation in the world has grown exponentially. Road transportation is the backbone of trade, access to markets, education and health care. Unfortunately, together with the advantages bestowed by road transportation comes the liability of road accidents. According to the World Health Organization’s ‘Global Status Report on Road Safety 2013’, the worldwide number of road traffic deaths is an unacceptable 1.24 million every year (WHO). Only 28 countries, covering 7% of the world’s population, have comprehensive road safety laws. In developing countries, most of the casualties are road vulnerable users. Over 90% of the accident fatalities occur in low-income and middle-income countries. Drinking and driving, speeding and failure to use motorcycle helmets, seat belts and child restraints are seen as the key risk factors. If no action were to be taken to stem the tide, the WHO expects the number of deaths to road traffic to rise to 2.4 million by 2030 (Michelin).
Road accidents have an economic aspect to them too. The cost of crashes in the world is estimated to be of 518 billion US Dollars. The burden on developing countries is of 65 billion Dollars. The massive drain of human lives and livelihoods has propelled the UN General Assembly to declare the decade 2011-20 as the Decade for Action on Road Safety.
Methods of Costing Crashes
At the level of countries, it is important to estimate the cost of crashes for the overall economy. This gives an indication of the socio-economic costs of road crashes, and gives governments a framework to assess the efficacy of measures taken to prevent accidents. Governments can also do a cost-benefit analysis of road safety programs.
Road crashes are usually subdivided into fatal crashes involving casualties; serious crashes involving serious injuries and slight crashes involving minor injuries. Various methods of costing crashes are described below.
The Gross Output or Human Capital Approach. In this approach, costs can be divided into those that cause a diversion of current resources and those that lead to a loss of future output. The first category would include items such as damage to property including vehicles, the cost of medical treatment and police and administrative costs, including those of insurance and courts. There is considerably lesser consensus on the components of future output. Estimates are invariably taken from averages. The loss-output method generally entails the average amount of working years lost due to the accident, which is multiplied by the average wage. The resultant sum is discounted to present-day values. Additional components could be added to account for the grief and suffering of the immediate family and dependents (Michelin).
The lost output method suffers from a number of criticisms. On ethical grounds, people object to the statistical method of ascribing a greater value to balance productive life for someone working in the West as opposed to someone in a developing country. There is also debate as to how to account for domestic work or the time lost in traffic. The method also requires extensive information that may not always be available in developing countries. In addition, it is always difficult to take into account the social impact of the loss of the family breadwinner. The lack of adequate social legislation in developing countries to provide social welfare benefits to the family of the deceased also needs to be factored in (Michelin).
‘The Value of Risk Change’ or ‘Willingness to Pay’ Approach. This approach is based on the premise that any public decision reflects the preferences of citizens. The method estimates the value given to a road safety risk reduction, and the value is computed as the aggregated amount that people are willing to pay for it. It could also be estimated by the amount people would require in compensation for an increased risk. While this method lays a higher premium to human life, it is difficult to implement due to inherent dangers of interviewer bias or sampling bias. Nevertheless, this method is in greater vogue in developed countries like the UK (Michelin).
The ‘Net Output’ Approach. The difference between this approach and the ‘Human Capital’ approach is that the discounted value of the victim’s future consumption is subtracted from the gross output figure. The underlying logic is that the difference between consumption and production is the actual value added to society. This method has the limitation of not being able to accurately calculate a person’s potential lifetime consumption (Michelin).
The ‘Life Insurance’ Approach. This approach considers the extent to which victims are willing to insure their lives. The insurance value is taken as a benchmark to arrive at values of victims’ lives. The method has the pitfall of the possibility of family members being insured for lesser amounts than the head of the family. Also, allowance would be required to be given to the fact that insurance is not ubiquitous in the developing world (Michelin).
The ‘Court Award’ Approach. This method arrives as the value of life by averaging the sum awarded by courts to surviving dependents in accidents in cases of crime or negligence. The approach is of limited value as the courts announce awards depending upon the culpability of the culprit (Michelin).
The ‘Implicit Public Sector Valuation’ Approach. This approach calls for estimates based on implicit values set by state regulation and public policies. This approach has the limitation of different values ascribed by the state depending upon the sector (Michelin).
Cost of Accidents in A Few Countries
Based on the approaches of costing crashes, different countries work out the cost of crashes as affecting their national economies. A few representative samples are outlined below.
European Union. The European Union calculates the cost of accidents on the ‘willingness to pay’ approach. The costs and valuations of UK, Sweden, Finland, Denmark and Switzerland are taken at face values, as these countries already follow the ‘willingness to pay’ approach. Extrapolations and estimations are done for other states. The total socio-economic cost of 45,000 fatalities in 1995 works out to 162 Billion Euros (ETSC).
United States. For the USA, the National Highway Traffic Safety Administration (NHTSA) has calculated the cost of accidents as a combination of costs covered by employers, to include health fringe benefit costs, non-fringe costs and wage premiums. The NHTSA observes that employer costs extend beyond the company premises. The economic cost of US highway crashes for 1994 was accordingly worked out to 150 Billion US Dollars (NHTSA).
Egypt. While the developed countries adopt the ‘willingness to pay’ approach, most developing countries, including Egypt, have used the ‘Human Capital’ approach to estimate the cost of accidents. Egypt employs two methodologies to arrive at the cost. The first method involves determining the average cost of a fatality in the framework of human capital method, and extrapolating for all casualties. The second method involves obtaining the average accident cost based on severity, and then computing the cost of accidents for all severity levels. Calculations reveal that the annual cost of accidents as per the Human Capital approach for the year 2008 for Egypt worked out to 16 Billion Egyptian Pounds (Ismael and Abdelmageed).
Effect of Safety Measures
As seen from the above estimates, there is a substantial cost involved in accidents, whichever method is used to ascertain the cost to society. Having calculated the costs, it is incumbent of nations to engage in a cost benefit analysis regarding the costs involved in ensuring better safety measures or better monitoring measures. In this regard, the NHTSA (2002) has worked out the costs that would be saved by society should certain safety measures be made mandatory for road traffic. Seat belts remain the most effective safety device in preventing serious injuries and reducing fatalities. In US national seat belt usage were to rise from 68% (as measured in 1996) to 90%, the resulting economic savings were calculated to be about $8.8 Billion annually. Similarly, child safety seats are acknowledged as extremely effective means of preventing injuries to children. It is estimated that an additional 143 lives would have been saved in 2000 if child restraint usage were to be 100%. Airbags are also widely acknowledged as having the potential to save lives. The NHSTA estimates that a 51% fatality reduction would ensue if airbags were to be used in conjunction with lap-shoulder belts (NHSTA, 2002)
Traffic accidents are expensive to society in terms of loss of valuable human life and attendant loss of vehicles and property. There are a number of methods to arrive at the cost of accidents, the most important of which are the ‘Willingness to Pay’ approach and the ‘Human Capital Approach’. While developed countries prefer the ‘willingness to pay’ approach, developing countries employ the ‘human capital approach’. The costs underline the emergent need to take measures to reduce accidents. A snapshot of safety measures reveals the substantial savings in economic terms and in terms of human lives that can accrue should such safety measures be made mandatory in application.
European Transport Safety Council (ETSC). “Transport Accident Costs and the Value of Safety.” 1997. Web. February 15, 2015.
Ismael, Mohammed A., and Abdelmageed, Samar M.M. “Cost of Road Traffic Accidents in Egypt.” International Journal of Social, Education, Economics and Management Engineering 4/6: 222-228. 2010. Web. February 16, 2015.
Michelin. “Making the Business Case for Road Safety Investment to Achieve Sustainable Road Mobility.” White Paper on the 11th Edition of the Challenge Bibendum, Berlin. 2011. Web. February 15, 2015.
National Highway Traffic Safety Administration (NHTSA). “What do Traffic Crashes Cost?” 1996. Web. February 15, 2015.
NHTSA Occupant Protection Division. “Winter 2002 Report.” 2002. Web. February 15, 2015
World Health Organization (WHO). “Global Status Report on Road Safety: 2013”. 2013. Web. February 16, 2015.
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