Ins301- Ch 13

Auto-Insurance

• Third party liability

• First party medical payments

• In no-fault states: PIP coverage for medical expenses and lost income

• Uninsured and underinsured motorists

• Physical damage

Ins301- Ch 13

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

Ins301- Ch 13

Liability Coverage

• Compulsory liability

• Most states make minimum limits mandatory• RI is an exception

• Financial responsibility laws

• Penalize negligent drivers who cannot pay minimum damage amount

• All states have such laws

• Liability insurance satisfies laws

Ins301- Ch 13

Liability Coverage

• Who is insured and when?

• Named insured plus • resident spouse• other family members• others who use the covered auto with permission

• Covered auto is vehicle listed on the policy plus• newly acquired vehicles• temporary substitute vehicles

Ins301- Ch 13

Liability Coverage

• Types of exclusions

• Intentional injury or damage

• Injury to an employee covered under WC

• Business vehicles

• Vehicles with less than 4 wheels

Ins301- Ch 13

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

Ins301- Ch 13

Medical Payments Coverage

• In no-fault states:

• Personal injury protection (PIP)

• Often compulsory

• Also provides limited loss of income coverage

Ins301- Ch 13

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

Ins301- Ch 13

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

Ins301- Ch 13

Auto Insurance Price Increases

Ins301- Ch 13

Rating Factors

• Driver characteristics

• Age• Gender• Marital status• Use of the auto• Number of autos• Other factors

• Driving Record

• Territory

Ins301- Ch 13

Restrictions on Rating Factors

• Examples

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

Ins301- Ch 13

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

Ins301- Ch 13

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

Ins301- Ch 13

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

Ins301- Ch 13

Residual Market Share by State

Ins301- Ch 13

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

Ins301- Ch 13

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)

Ins301- Ch 13

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

Ins301- Ch 13

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

Ins301- Ch 13

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

Ins301- Ch 13

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”

Ins301- Ch 13

Effect of No-fault on Premiums

• Depends on

• Limitations on tort liability

• Level of mandatory PIP coverage