Auto Insurance Fundamentals: Coverages and Ratemaking

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Auto Insurance FundamentalsCoverages and
Ratemaking

• Michael R. Powers
• The Fox School, Temple University

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Auto Insurance Coverages

• Bodily Injury Liability (BI)
• Property Damage Liability (PDL)
• First-Party Benefits (FPB)
• Uninsured Motorists (UM)
• Underinsured Motorists (UIM)
• Collision (Coll.)
• Comprehensive (Comp.)

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Bodily Injury Liability (BI)

• Compensates for personal injury
• Economic damages (medical/income-loss)
• Non-economic damages (painsuffering)
• Paid on third-party basis
• Required limits in Pennsylvania
• 15,000 per person
• 30,000 per accident
• Optional higher limits available

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Property Damage Liability (PDL)

• Compensates for physical damage
• Auto repairs/replacement
• Other property repairs/replacement
• Paid on third-party basis
• Required limit in Pennsylvania
• 5,000 per accident
• Optional higher limits available

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First-Party Benefits(FPB)

• Compensates for personal injury
• Economic damages only (medical/income-loss)
• Paid on first-party basis
• Required limit in Pennsylvania
• 5,000 medical per person
• Optional coverages available
• Higher limits of medical (including EMB)
• Income-loss
• Accidental death

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Uninsured Motorists (UM)

• Compensates for personal injury
• Economic damages (medical/income-loss)
• Non-economic damages (painsuffering)
• Paid on first-party basis
• Optional in Pennsylvania -- various limits
  available
• Stacked -- all insureds autos
• Unstacked -- one auto at a time

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Underinsured Motorists (UIM)

• Compensates for personal injury
• Economic damages (medical/income-loss)
• Non-economic damages (painsuffering)
• Paid on first-party basis
• Optional in Pennsylvania -- various limits
  available
• Stacked -- all insureds autos
• Unstacked -- one auto at a time

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Collision (Coll.)

• Compensates for physical damage
• Auto and other property damaged in a collision
• Paid on first-party basis
• Optional in Pennsylvania -- various deductibles
  available

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Comprehensive (Comp.)

• Compensates for physical damage
• Auto and other property damaged not in a
  collision (e.g., from vandalism, theft)
• Paid on first-party basis
• Optional in Pennsylvania -- various deductibles
  available

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Pennsylvania Coverage Summary
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Basic Auto Insurance Ratemaking Concepts

• Exposure One unit of risk ( automobile)
• Claim Frequency (Claims)/(Exposures)
• Claim Severity ( Losses)/( Claims)
• Pure Premium Frequency x Severity
• ( Losses)/( Exposures)
• Loss Ratio ( Losses)/( Premiums)

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Losses (Often Including Allocated Loss Adj.
Expenses)

• Calendar-Year Losses
• All paid losses
• change in total loss reserves
• Accident-Year Losses
• All paid losses
• case reserves
• bulk reserves (IBNR)

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AY Loss Development

• Loss Dev. Triangle (Hypothetical)

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Premiums

• Written Premiums
• All premiums collected from new and renewal
  business in a given year
• Earned Premiums
• All premiums associated with coverage actually
  provided in a given year

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Expenses

• Written Expenses
• All expenses gathered from new and renewal
  business in a given year
• Earned Expenses
• All expenses associated with coverage actually
  provided in a given year

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Breakdown of Auto InsuranceRevenue Dollar
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Basic Ratemaking Formulas

• Pure Premium Method
• Dev./Trended AY Losses
• New Rate Trended Fixed Expenses
• (1 - v i) x Earned Exposures
• Loss Ratio Method
• Dev./Trended AY Losses
• Rate Change Trended Fixed Expenses
• (1 - v i) x Earned Premiums

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Final Modifications

• Increased limits factors
• Deductible factors
• Territorial relativities
• Driver class relativities
• Model-type/Model-year relativities