chapter 13: auto

Auto insurance

chapter 13

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

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

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

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

Liability Coverage

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

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

Medical Payments Coverage

– In no-fault states:• Personal injury protection (PIP)

• Often compulsory

• Also provides limited loss of income coverage

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

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

Auto Insurance Price Increases

Average Auto Insurance Expenditures by State

Rating Factors

– Driver characteristics• Age

• Gender

• Marital status

• Use of the auto

• Number of autos

• Other factors

– Driving Record– Territory: congestion, weather, crime

Bodily Injury Claim Frequency

Restrictions on Rating Factors

– Examples• Gender

• Marital status

• Use driving experience instead of age (MA)

• Territory

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

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

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

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

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.

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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

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.

Drivers Education

• Johns-Hopkins study– For teenage drivers, driver’s education does

NOT• Reduce accidents

• Reduce tickets– Source: Kansas City Star, September 24, 2000

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


9 1988 TOYOTA CAMRY



12 1997 FORD F150 4X2




16 1987 TOYOTA CAMRY




20 1993 JEEP GRAND CHEROKEE 4X4

2001's Top 25 Most Stolen Vehicles Reportfor TexasSource: CCC Information Services Inc.

Rank Year Make Model-Name



3 1997 FORD F150 4X2

4 2000 CHEVROLET C1500 4X2 SILVERADO


6 2001 DODGE BR1500 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


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

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 3:44 PM ET Oct 27, 2000

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

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

Residual Market Share by State

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


– 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)


– 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

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 < true costs

• 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

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)

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

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

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”

Effect of No-fault on Premiums

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

chapter 13: auto

Economy & Finance