Chapter 13: Auto


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Chapter 13: Auto

  1. 1. Auto insurance chapter 13
  2. 2. Overview <ul><li>35 million accidents per year </li></ul><ul><li>45,000 deaths </li></ul><ul><li>over $120 billion in losses </li></ul><ul><li>major loss exposures </li></ul><ul><ul><li>legal liability </li></ul></ul><ul><ul><li>personal injury </li></ul></ul><ul><ul><li>property damage to the auto </li></ul></ul>
  3. 3. Liability Coverage <ul><li>Single limit </li></ul><ul><li>Split limits </li></ul><ul><ul><li>Example </li></ul></ul><ul><ul><ul><li>100,000 per person for bodily injury </li></ul></ul></ul><ul><ul><ul><li>300,000 per accident for bodily injury </li></ul></ul></ul><ul><ul><ul><li>50,000 per accident for property damage </li></ul></ul></ul>
  4. 4. Liability Coverage <ul><li>Compulsory liability </li></ul><ul><ul><li>Most states make minimum limits mandatory </li></ul></ul><ul><li>Financial responsibility laws </li></ul><ul><ul><li>Penalize negligent drivers who cannot pay minimum damage amount </li></ul></ul><ul><ul><li>All states have such laws </li></ul></ul><ul><ul><li>Liability insurance satisfies laws </li></ul></ul>
  5. 5. Liability Coverage <ul><li>Who is insured and when? </li></ul><ul><ul><li>Named insured plus </li></ul></ul><ul><ul><ul><li>resident spouse </li></ul></ul></ul><ul><ul><ul><li>other family members </li></ul></ul></ul><ul><ul><ul><li>others who use the covered auto with permission; car is primary! </li></ul></ul></ul><ul><ul><li>Covered auto is vehicle listed on the policy plus </li></ul></ul><ul><ul><ul><li>newly acquired vehicles </li></ul></ul></ul><ul><ul><ul><li>temporary substitute vehicles </li></ul></ul></ul>
  6. 6. Liability Coverage <ul><li>Types of exclusions </li></ul><ul><ul><li>Intentional injury or damage </li></ul></ul><ul><ul><li>Injury to an employee covered under WC </li></ul></ul><ul><ul><li>Business vehicles </li></ul></ul><ul><ul><li>Vehicles with less than 4 wheels </li></ul></ul>
  7. 7. Medical Payments Coverage <ul><ul><li>In tort liability states </li></ul></ul><ul><ul><ul><li>Optional </li></ul></ul></ul><ul><ul><ul><li>Limits are generally low (e.g., $1,000 - $2,500) </li></ul></ul></ul><ul><ul><ul><li>Payments regardless of fault </li></ul></ul></ul><ul><ul><ul><li>Payments not coordinated with other medical expense insurance </li></ul></ul></ul><ul><ul><ul><ul><li>could collect twice </li></ul></ul></ul></ul>
  8. 8. Medical Payments Coverage <ul><ul><li>In no-fault states: </li></ul></ul><ul><ul><ul><li>Personal injury protection (PIP) </li></ul></ul></ul><ul><ul><ul><li>Often compulsory </li></ul></ul></ul><ul><ul><ul><li>Also provides limited loss of income coverage </li></ul></ul></ul>
  9. 9. Uninsured and Underinsured Motorists Coverage <ul><ul><li>Coverage if liable party has no or insufficient coverage </li></ul></ul><ul><ul><li>Coverage for all damages that otherwise would have been paid </li></ul></ul><ul><ul><ul><li>medical expenses </li></ul></ul></ul><ul><ul><ul><li>lost income </li></ul></ul></ul><ul><ul><ul><li>pain and suffering </li></ul></ul></ul><ul><ul><li>Compulsory in many states </li></ul></ul>
  10. 10. Physical Damage Coverage <ul><li>Collision </li></ul><ul><ul><li>Covers damage from collisions and rollovers </li></ul></ul><ul><li>Other-than-collision (comprehensive) </li></ul><ul><ul><li>Covers damage from </li></ul></ul><ul><ul><ul><li>falling objects, explosions, glass breakage, </li></ul></ul></ul><ul><ul><ul><li>earthquake, windstorms, hail, </li></ul></ul></ul><ul><ul><ul><li>contact with an animal </li></ul></ul></ul><ul><ul><li>Deductibles generally used for both </li></ul></ul>
  11. 11. Auto Insurance Price Increases
  12. 12. Average Auto Insurance Expenditures by State
  13. 13. Rating Factors <ul><ul><li>Driver characteristics </li></ul></ul><ul><ul><ul><li>Age </li></ul></ul></ul><ul><ul><ul><li>Gender </li></ul></ul></ul><ul><ul><ul><li>Marital status </li></ul></ul></ul><ul><ul><ul><li>Use of the auto </li></ul></ul></ul><ul><ul><ul><li>Number of autos </li></ul></ul></ul><ul><ul><ul><li>Other factors </li></ul></ul></ul><ul><ul><li>Driving Record </li></ul></ul><ul><ul><li>Territory: congestion, weather, crime </li></ul></ul>
  14. 14. Bodily Injury Claim Frequency
  15. 15. Restrictions on Rating Factors <ul><ul><li>Examples </li></ul></ul><ul><ul><ul><li>Gender </li></ul></ul></ul><ul><ul><ul><li>Marital status </li></ul></ul></ul><ul><ul><ul><li>Use driving experience instead of age (MA) </li></ul></ul></ul><ul><ul><ul><li>Territory </li></ul></ul></ul>
  16. 16. Underwriting <ul><li>Insurers have discretion to deny coverage in most states </li></ul><ul><li>==> Underwriting criteria </li></ul><ul><ul><li>Typically, lower rates are associated with more stringent underwriting criteria </li></ul></ul><ul><ul><ul><li>Example: </li></ul></ul></ul><ul><ul><ul><ul><li>deny if potential insured drinks alcohol </li></ul></ul></ul></ul><ul><ul><ul><ul><li>charge lower rates than competitors who do not use this criteria </li></ul></ul></ul></ul>
  17. 17. Drinking and driving <ul><li>Any level of alcohol = 8 times more likely to cause a fatal crash </li></ul><ul><li>Legally drunk = 15 times more likely </li></ul><ul><li>More significant than </li></ul><ul><ul><li>Male </li></ul></ul><ul><ul><li>Past driving record </li></ul></ul><ul><ul><li>Age </li></ul></ul><ul><ul><ul><ul><li>Source: Steven Levitt and Jack Porter, Estimating the Effect of Alcohol on Driver Risk, NBER Feb. 1999 </li></ul></ul></ul></ul>
  18. 18. Drinking and driving fatalities <ul><li>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. </li></ul><ul><li>Drunk driving now accounts for approximately 17,000 highway deaths </li></ul><ul><li>Matthew Wald. The New York Times. 2002/10/23 </li></ul>
  19. 19. Drinking and Driving <ul><li>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 </li></ul><ul><ul><li>Source: Clayton Kale. The St. Louis Post-Dispatch. 00/10/01, Page D1 </li></ul></ul>
  20. 20. Seat belts <ul><li>Not wearing a seat belt </li></ul><ul><ul><li>14 times the fatality rate </li></ul></ul><ul><ul><li>5 times the disability rate </li></ul></ul><ul><li>Primary seat belt laws increase usage 10-17% </li></ul><ul><ul><li>Drivers can be stopped merely because the seat belt is not in use </li></ul></ul><ul><ul><ul><ul><li>Source: Novelda Sommers. The Wichita Eagle. 00/06/18. Page 1A </li></ul></ul></ul></ul>
  21. 21. Teen drivers <ul><li>10% of fatalities were under age 18 </li></ul><ul><li>Missouri is the 44 th state with graduated licenses </li></ul><ul><ul><ul><li>Source: St. Louis Post-Dispatch, September 5, 2000 </li></ul></ul></ul>
  22. 22. Teens and passengers <ul><li>teen drivers with one passenger are 39 percent more likely to die in a wreck than when driving alone, </li></ul><ul><li>86 percent more likely when carrying two passengers. </li></ul><ul><li>John Petterson. The Kansas City Star. 2002/02/28. Page B1. </li></ul>
  23. 23. Drivers Education <ul><li>Johns-Hopkins study </li></ul><ul><ul><li>For teenage drivers, driver’s education does NOT </li></ul></ul><ul><ul><ul><li>Reduce accidents </li></ul></ul></ul><ul><ul><ul><li>Reduce tickets </li></ul></ul></ul><ul><ul><ul><ul><li>Source: Kansas City Star, September 24, 2000 </li></ul></ul></ul></ul>
  24. 24. GRAND CHEROKEE 4X4 JEEP 1993 20 ACCORD EX HONDA 1991 19 ACCORD LX HONDA 1992 18 ACCORD LX HONDA 1997 17 CAMRY TOYOTA 1987 16 ACCORD EX HONDA 1996 15 ACCORD LX HONDA 1991 14 ACCORD EX HONDA 1990 13 F150 4X2 FORD 1997 12 C1500 4X2 CHEVROLET 1993 11 ACCORD LX HONDA 1996 10 CAMRY TOYOTA 1988 9 ACCORD EX HONDA 1994 8 ACCORD LX HONDA 1994 7 ACCORD EX HONDA 1995 6 C1500 4X2 CHEVROLET 1994 5 CIVIC SI HONDA 2000 4 CAMRY TOYOTA 1990 3 CAMRY TOYOTA 1989 2 CAMRY TOYOTA 1991 1 Model-Name Make Year Rank 2001's Top 100 Most Stolen Vehicles Report for the United States Source: CCC Information Services Inc.
  25. 25. C15 4X2 EXTENDED CAB FLEETSIDE CHEVROLET 1992 21 CIVIC SI HONDA 2000 20 F150 4X2 FORD 1995 19 C1500 4X2 GMC 1994 18 C1500 4X2 SILVERADO CHEVROLET 1999 17 ACCORD EX HONDA 1995 16 C15 4X2 FLEETSIDE CHEVROLET 1992 15 MUSTANG FORD 1998 14 C15 4X2 EXTENDED CAB FLEETSIDE CHEVROLET 1991 13 MUSTANG FORD 2000 12 F150 4X2 FORD 2001 11 F150 4X2 XL FORD 1998 10 F150 4X2 FORD 2000 9 C1500 4X2 CHEVROLET 1997 8 C1500 4X2 CHEVROLET 1996 7 BR1500 4X2 DODGE 2001 6 C1500 4X2 CHEVROLET 1995 5 C1500 4X2 SILVERADO CHEVROLET 2000 4 F150 4X2 FORD 1997 3 C1500 4X2 CHEVROLET 1993 2 C1500 4X2 CHEVROLET 1994 1 Model-Name Make Year Rank 2001's Top 25 Most Stolen Vehicles Report for Texas Source: CCC Information Services Inc.
  26. 26. Gender rating <ul><li>18 year-old Females charged 38% less </li></ul><ul><li>Two accidents a year would still leave the rate lower for females! </li></ul><ul><li>Males </li></ul><ul><ul><li>63% miles driven </li></ul></ul><ul><ul><li>Twice as likely to DWI </li></ul></ul><ul><ul><li>70% higher fatality rate per mile driven! </li></ul></ul><ul><ul><ul><ul><li>Source: In defense of gender-based rates Why insurance shouldn't go all unisex for auto, disability” by Kristen Gerencher , 3:44 PM ET Oct 27, 2000 </li></ul></ul></ul></ul>
  27. 27. Government Restrictions on Underwriting <ul><ul><li>Some states require insurers to accept all applicants, I.e., no underwriting </li></ul></ul><ul><ul><li>Underwriting restrictions are generally related to rating restrictions </li></ul></ul><ul><ul><ul><li>otherwise rating restrictions can be circumvented </li></ul></ul></ul><ul><ul><li>Disadvantages of restrictions (see Ch. 8) </li></ul></ul><ul><ul><ul><li>Prices do not reflect expected costs as closely ==> distorts behavior </li></ul></ul></ul><ul><ul><ul><li>Costly to enforce </li></ul></ul></ul>
  28. 28. Residual Markets <ul><ul><li>Provide insurance at a regulated price to those who otherwise would find it difficult to buy insurance </li></ul></ul><ul><ul><ul><li>All states have one </li></ul></ul></ul><ul><ul><ul><li>Market shares vary widely </li></ul></ul></ul><ul><ul><ul><ul><li>Higher market share in states with </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>more restrictions on rating and underwriting </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>more regulation of rate changes </li></ul></ul></ul></ul></ul>
  29. 29. Residual Market Share by State
  30. 30. Types of Residual Market Plans <ul><ul><li>Assigned risk plans </li></ul></ul><ul><ul><ul><li>Most states </li></ul></ul></ul><ul><ul><ul><li>Applicants assigned to insurers in proportion to their market share </li></ul></ul></ul><ul><ul><ul><li>Insurer receives the (regulated) premium and pays claims </li></ul></ul></ul>
  31. 31. Types of Residual Market Plans <ul><ul><li>Reinsurance facilities </li></ul></ul><ul><ul><ul><li>Each insurer sells to all applicants </li></ul></ul></ul><ul><ul><ul><li>Insurer can reinsure unwanted insureds to state reinsurer </li></ul></ul></ul><ul><ul><ul><li>Deficit of reinsurer is paid </li></ul></ul></ul><ul><ul><ul><ul><li>by all insurers in proportion to their market share </li></ul></ul></ul></ul><ul><ul><ul><ul><li>by all policyholders (recoupment fee) </li></ul></ul></ul></ul>
  32. 32. Types of Residual Market Plans <ul><ul><li>Joint underwriting associations </li></ul></ul><ul><ul><ul><li>State hires several insurers to insure unwanted policyholders </li></ul></ul></ul><ul><ul><ul><li>Agents submit applications to these insurers </li></ul></ul></ul><ul><ul><ul><li>Deficit is paid by all insurers in proportion to their market share </li></ul></ul></ul><ul><ul><li>State insurer (MD) </li></ul></ul><ul><ul><ul><li>Deficit is paid by all insurers in proportion to their market share </li></ul></ul></ul>
  33. 33. Economic Rationale for Compulsory Auto Insurance <ul><ul><li>Without it, accident costs will not be borne by those who cause accidents </li></ul></ul><ul><ul><ul><li>Uninsured do not bear the full cost of their driving </li></ul></ul></ul><ul><ul><ul><li>==> some drive even though benefits of driving < true costs </li></ul></ul></ul><ul><ul><ul><li>Uninsured do not bear the full cost of decisions to drive less safely </li></ul></ul></ul><ul><ul><ul><li>==> drive less safely than if forced to purchase insurance with experience rating </li></ul></ul></ul>
  34. 34. Criticisms of Compulsory Insurance <ul><ul><li>Its regressive </li></ul></ul><ul><ul><ul><li>I.e., it disproportionately hurts low income people </li></ul></ul></ul><ul><ul><ul><li>Forces them to buy insurance to protect other people </li></ul></ul></ul><ul><ul><li>Weak enforcement </li></ul></ul><ul><ul><li>Better to allow people to opt out by making a contribution to the state (VA, SC) </li></ul></ul>
  35. 35. No-fault versus Tort Liability <ul><ul><li>Tort liability </li></ul></ul><ul><ul><ul><li>Drivers that cause accidents can be sued for the losses incurred by others </li></ul></ul></ul><ul><ul><li>Pure no-fault </li></ul></ul><ul><ul><ul><li>Drivers pay their own costs regardless of fault </li></ul></ul></ul><ul><ul><ul><li>No law suits </li></ul></ul></ul><ul><ul><li>No state has pure no-fault </li></ul></ul><ul><ul><ul><li>Tort liability is restricted, not eliminated </li></ul></ul></ul>
  36. 36. No-fault Laws <ul><ul><li>Mandatory PIP coverage </li></ul></ul><ul><ul><ul><li>Varies across states </li></ul></ul></ul><ul><ul><ul><li>Under $10,000 in MA, unlimited in MI </li></ul></ul></ul><ul><ul><li>Limitations on suits </li></ul></ul><ul><ul><ul><li>Cannot sue for losses covered by mandatory PIP </li></ul></ul></ul><ul><ul><ul><li>Cannot sue for pain and suffering unless </li></ul></ul></ul><ul><ul><ul><ul><li>losses exceed a monetary threshold </li></ul></ul></ul></ul><ul><ul><ul><ul><li>losses meet verbal threshold </li></ul></ul></ul></ul>
  37. 37. Arguments For and Against No-fault <ul><li>For </li></ul><ul><ul><li>More efficient compensation system </li></ul></ul><ul><ul><ul><li>Less pain & suffering compensation </li></ul></ul></ul><ul><ul><ul><li>Faster compensation </li></ul></ul></ul><ul><ul><ul><li>Lower legal costs </li></ul></ul></ul><ul><li>Against </li></ul><ul><ul><li>Reduces safety </li></ul></ul><ul><ul><li>Not “fair” </li></ul></ul>
  38. 38. Effect of No-fault on Premiums <ul><li>Depends on </li></ul><ul><ul><li>Limitations on tort liability </li></ul></ul><ul><ul><li>Level of mandatory PIP coverage </li></ul></ul>