Chapter Outline

1
Chapter Outline

• 21.1 Overview of Auto Loss Exposures and
  Insurance
• Coverage Under the Personal Auto Policy
• Liability Coverage
• Medical Payments Coverage
• Uninsured and Underinsured Motorists Coverage
• Damage and Other Losses to Autos
• 21.2 Auto Insurance Pricing and Underwriting
• Rating Factors
• Driver Classes
• Driving Record
• Territorial Rating
• Government Restrictions on Rating Factors
• Underwriting
• Should the Government Restrict Underwriting?
• Cancellation and Non-Renewal
• Residual Markets

2
Chapter Outline

• 21.3 Should Auto Insurance be Compulsory?
• Economic Rationale
• Effects on Decisions to Drive
• Safety Effects
• Criticisms / Limitations of Compulsory
  Insurance
• Regressive Impact on the Distribution of
  Income / Pressure
• for Subsidies
• Weak Enforcement
• Alternatives to Compulsory Insurance

3
Chapter Outline

• 21.4 Should Tort Liability be Limited with
  No-Fault Laws?
• No-Fault Compared to Tort Liability
• PIP Benefits
• Limitations on Tort Liability
• The Rationale for and Against No-Fault
• More Efficient Compensation with No-Fault
• Effect on Safety and Decisions to Drive
• Retribution and Fairness
• How Does No-Fault Affect Premiums?
• Effect on Auto Insurance Premiums
• Effect on Premiums for Group Medical Coverage
• Choice No-Fault
• Other Proposals to Limit Tort Liability
• 21.5 Summary

4
Types of Coverage

• Third party liability
• First party medical payments
• In no-fault states PIP coverage for medical
  expenses and lost income
• Uninsured and underinsured motorists
• Physical damage

5
Liability Coverage

• Single limit
• Split limits
• Example
• 100,000 per person for bodily injury
• 300,000 per accident for bodily injury
• 50,000 per accident for property damage

6
Liability Coverage

• Compulsory liability
• Most states make minimum limits mandatory
• Financial responsibility laws
• Penalize negligent drivers who cannot pay minimum
  damage amount
• All states have such laws
• Liability insurance satisfies laws

7
Liability Coverage

• Who is insured and when?
• Named insured plus
• resident spouse
• other family members
• others who use the covered auto with permission
• Covered auto is vehicle listed on the policy plus
• new acquired vehicles
• temporary substitute vehicles

8
Liability Coverage

• Types of exclusions
• intentional injury or damage
• injury to an employee covered under WC
• business vehicles
• vehicles with less than 4 wheels

9
Medical Payments Coverage

• In tort liability states
• Optional
• Limits are generally low (e.g., 1,000 - 2,500)
• Payments regardless of fault
• Payments not coordinated with other medical
  expense insurance
• could collect twice

10
Medical Payments Coverage

• In no-fault states
• Personal injury protection (PIP)
• Often compulsory
• Also provides limited loss of income coverage

11
Uninsured and Underinsured Motorists Coverage

• Coverage if liable party has no or insufficient
  coverage
• Coverage for all damages that otherwise would
  have been paid
• medical expenses
• lost income
• pain and suffering
• Compulsory in many states

12
Physical Damage Coverage

• Collision
• Covers damage from collisions and rollovers
• Other-than-collision (comprehensive)
• Covers damage from
• falling objects, explosions, glass breakage,
• earthquake, windstorms, hail,
• contact with an animal
• Deductibles generally used for both

13
Auto Insurance Price Increases
14
Average Auto Insurance Expenditures by State
15
Rating Factors

• Driver characteristics
• Age
• Gender
• Marital status
• Use of the auto
• Number of autos
• Other factors
• Driving Record
• Territory

16
Bodily Injury Claim Frequency
17
Restrictions on Rating Factors

• Examples
• Gender
• Marital status
• Use driving experience instead of age (MA)
• Territory

18
Underwriting

• Insurers have discretion to deny coverage in most
  states
• Underwriting criteria
• Typically, lower rates are associated with more
  stringent underwriting criteria
• Example
• deny if potential insured drinks alcohol
• charge lower rates than competitors who do not
  use this criteria

19
Government Restrictions on Underwriting

• Some states require insurers to accept all
  applicants, I.e., no underwriting
• Underwriting restrictions are generally related
  to rating restrictions
• otherwise rating restrictions can be circumvented
• Disadvantages of restrictions (see Ch. 6)
• prices do not reflect expected costs as closely
  distorts behavior
• costly to enforce

20
Residual Markets

• Provide insurance at a regulated price to those
  who otherwise would find it difficult to buy
  insurance
• All states have one
• Market shares vary widely
• Higher market share in states with
• more restrictions on rating and underwriting
• more regulation of rate changes

21
Residual Market Share by State
22
Types of Residual Market Plans

• Assigned risk plans
• Most states
• Applicants assigned to insurers in proportion to
  their market share
• Insurer receives the (regulated) premium and pays
  claims

23
Types of Residual Market Plans

• Reinsurance facilities
• Each insurer sells to all applicants
• Insurer can reinsure unwanted insureds to state
  reinsurer
• Deficit of reinsurer is paid
• by all insurers in proportion to their market
  share
• by all policyholders (recoupment fee)

24
Types of Residual Market Plans

• Joint underwriting associations
• State hires several insurers to insure unwanted
  policyholders
• Agents submit applications to these insurers
• Deficit is paid by all insurers in proportion to
  their market share
• State insurer (MD)
• Deficit is paid by all insurers in proportion to
  their market share

25
Economic Rationale for Compulsory Auto Insurance

• Without it, accident costs will not be borne by
  those who cause accidents
• Uninsured do not bear the full cost of their
  driving
• some drive even though benefits of driving
  
• Uninsured do not bear the full cost of decisions
  to drive less safely
• drive less safely than if forced to purchase
  insurance with experience rating

26
Criticisms of Compulsory Insurance

• Its regressive
• I.e., it disproportionately hurts low income
  people
• Forces them to buy insurance to protect other
  people
• Weak enforcement
• Better to allow people to opt out by making a
  contribution to the state (VA, SC)

27
No-fault versus Tort Liability

• Tort liability
• Drivers that cause accidents can be sued for the
  losses incurred by others
• Pure no-fault
• Drivers pay their own costs regardless of fault
• No law suits
• No state has pure no-fault
• Tort liability is restricted, not eliminated

28
No-fault Laws

• Mandatory PIP coverage
• Varies across states
• Under 10,000 in MA, unlimited in MI
• Limitations on suits
• Cannot sue for losses covered by mandatory PIP
• Cannot sue for pain and suffering unless
• losses exceed a monetary threshold
• losses meet verbal threshold

29
Arguments For and Against No-fault

• For
• More efficient compensation system
• Less pain suffering compensation
• Faster compensation
• Lower legal costs
• Against
• Reduces safety
• Not fair

30
Affect of No-fault on Premiums

• Depends on
• Limitations on tort liability
• Mandatory PIP coverage