Auto insurance

1
Auto insurance

• chapter 13

2
Overview

• 35 million accidents per year
• 45,000 deaths
• over 120 billion in losses
• major loss exposures
• legal liability
• personal injury
• property damage to the auto

3
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

4
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

5
Liability Coverage

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

6
Liability Coverage

• Types of exclusions
• Intentional injury or damage
• Injury to an employee covered under WC
• Business vehicles
• Vehicles with less than 4 wheels

7
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

8
Medical Payments Coverage

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

9
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

10
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

11
Auto Insurance Price Increases
12
Average Auto Insurance Expenditures by State
13
Rating Factors

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

14
Bodily Injury Claim Frequency
15
Restrictions on Rating Factors

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

16
Underwriting

• Insurers have discretion to deny coverage in most
  states
• gt 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

17
Drinking and driving

• Any level of alcohol 8 times more likely to
  cause a fatal crash
• Legally drunk 15 times more likely
• More significant than
• Male
• Past driving record
• Age
• Source Steven Levitt and Jack Porter,
  Estimating the Effect of Alcohol on Driver Risk,
  NBER Feb. 1999

18
Drinking and driving fatalities

• After declining steadily for 15 years the
  percentage of highway fatalities involving
  alcohol in the U.S. began to rise again in the
  late 1990s.
• Drunk driving now accounts for approximately
  17,000 highway deaths
• Matthew Wald. The New York Times. 2002/10/23

19
Drinking and Driving

• Illinois experienced a 13.7 drop in fatal
  accidents involving alcohol when they lowered the
  legal definition of drunkenness from 0.10 to 0.08
• Source Clayton Kale. The St. Louis
  Post-Dispatch. 00/10/01, Page D1

20
Seat belts

• Not wearing a seat belt
• 14 times the fatality rate
• 5 times the disability rate
• Primary seat belt laws increase usage 10-17
• Drivers can be stopped merely because the seat
  belt is not in use
• Source Novelda Sommers. The Wichita Eagle.
  00/06/18. Page 1A

21
Teen drivers

• 10 of fatalities were under age 18
• Missouri is the 44th state with graduated
  licenses
• Source St. Louis Post-Dispatch, September 5,
  2000

22
Teens and passengers

• teen drivers with one passenger are 39 percent
  more likely to die in a wreck than when driving
  alone,
• 86 percent more likely when carrying two
  passengers.
• John Petterson. The Kansas City Star. 2002/02/28.
  Page B1.

23
Drivers Education

• Johns-Hopkins study
• For teenage drivers, drivers education does NOT
• Reduce accidents
• Reduce tickets
• Source Kansas City Star, September 24, 2000

24
2001's Top 100 Most Stolen Vehicles Reportfor the United StatesSource CCC Information Services Inc. 2001's Top 100 Most Stolen Vehicles Reportfor the United StatesSource CCC Information Services Inc. 2001's Top 100 Most Stolen Vehicles Reportfor the United StatesSource CCC Information Services Inc. 2001's Top 100 Most Stolen Vehicles Reportfor the United StatesSource CCC Information Services Inc.
Rank Year Make Model-Name
1 1991 TOYOTA CAMRY
2 1989 TOYOTA CAMRY
3 1990 TOYOTA CAMRY
4 2000 HONDA CIVIC SI
5 1994 CHEVROLET C1500 4X2
6 1995 HONDA ACCORD EX
7 1994 HONDA ACCORD LX
8 1994 HONDA ACCORD EX
9 1988 TOYOTA CAMRY
10 1996 HONDA ACCORD LX
11 1993 CHEVROLET C1500 4X2
12 1997 FORD F150 4X2
13 1990 HONDA ACCORD EX
14 1991 HONDA ACCORD LX
15 1996 HONDA ACCORD EX
16 1987 TOYOTA CAMRY
17 1997 HONDA ACCORD LX
18 1992 HONDA ACCORD LX
19 1991 HONDA ACCORD EX
20 1993 JEEP GRAND CHEROKEE 4X4
25
2001's Top 25 Most Stolen Vehicles Reportfor TexasSource CCC Information Services Inc. 2001's Top 25 Most Stolen Vehicles Reportfor TexasSource CCC Information Services Inc. 2001's Top 25 Most Stolen Vehicles Reportfor TexasSource CCC Information Services Inc. 2001's Top 25 Most Stolen Vehicles Reportfor TexasSource CCC Information Services Inc.
Rank Year Make Model-Name
1 1994 CHEVROLET C1500 4X2
2 1993 CHEVROLET C1500 4X2
3 1997 FORD F150 4X2
4 2000 CHEVROLET C1500 4X2 SILVERADO
5 1995 CHEVROLET C1500 4X2
6 2001 DODGE BR1500 4X2
7 1996 CHEVROLET C1500 4X2
8 1997 CHEVROLET C1500 4X2
9 2000 FORD F150 4X2
10 1998 FORD F150 4X2 XL
11 2001 FORD F150 4X2
12 2000 FORD MUSTANG
13 1991 CHEVROLET C15 4X2 EXTENDED CAB FLEETSIDE
14 1998 FORD MUSTANG
15 1992 CHEVROLET C15 4X2 FLEETSIDE
16 1995 HONDA ACCORD EX
17 1999 CHEVROLET C1500 4X2 SILVERADO
18 1994 GMC C1500 4X2
19 1995 FORD F150 4X2
20 2000 HONDA CIVIC SI
21 1992 CHEVROLET C15 4X2 EXTENDED CAB FLEETSIDE




26
Gender rating

• 18 year-old Females charged 38 less
• Two accidents a year would still leave the rate
  lower for females!
• Males
• 63 miles driven
• Twice as likely to DWI
• 70 higher fatality rate per mile driven!
• Source In defense of gender-based rates Why
  insurance shouldn't go all unisex for auto,
  disability by Kristen Gerencher,
  CBS.MarketWatch.com 344 PM ET Oct 27, 2000

27
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. 8)
• Prices do not reflect expected costs as closely
  gt distorts behavior
• Costly to enforce

28
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

29
Residual Market Share by State
30
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

31
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)

32
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

33
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
• gt some drive even though benefits of driving
  lt true costs
• Uninsured do not bear the full cost of decisions
  to drive less safely
• gt drive less safely than if forced to purchase
  insurance with experience rating

34
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)

35
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

36
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

37
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

38
Effect of No-fault on Premiums

• Depends on
• Limitations on tort liability
• Level of mandatory PIP coverage