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
• 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
(No Transcript)
25
(No Transcript)
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
  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
• 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

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