Auto Insurance

Folks exposed to the business side of auto insurance are aware that claim frequency has been helped recently by demographic trends, and changes impacting teen drivers, including the introduction of graduated licensing.

It looks like a few of those teen-impacting trends may continue.   Seen at CNN:

Starting next year, Ford Motor Co. will allow parents to limit the speed at which their teenage children drive their car.

The company will roll out a new feature on many 2010 models that can limit teen drivers to 80 mph (130 kph), using a computer chip in the key.

Parents in the United States, where most teens can get their drivers license at 16, also have the option of programming the car key to limit the audio system’s volume, and to sound continuous alerts if the driver doesn’t wear a seat belt.[…]

Ford arrived at the 80 mph (130 kph) limit even though freeway speed limits are lower in most states because it wanted to leave a margin in case an unusual situation arises, Buczkowski said. In some states, freeway speed limits are above 70 mph (112 kph), Sherwood said.[…]

Ford said its market research shows 75 percent of parents like the speed and audio limits, but as you might expect, 67 percent of teens don’t like them.

I suppose that it’s time to start thinking about how to tweak the interaction of vehicle symbol, driver class, and/or discounts to account for vehicle features such as this.

Even though they do a horrible job explaining it, the AJC mentions one less-publicized provision in Georgia’s new auto insurance law which is definitely worth noting:

The so-called “stacking provision” in SB 276 will allow you to piggy-back your uninsured/underinsured motorists protection onto another motorist’s policy. That way, if you’re hit in an accident and the at-fault driver has no insurance or not enough insurance to cover damages and expenses, your policy would make up the difference to the extent of your policy’s limits.

After the the new law takes effect, you’ll have three options when you renew your auto insurance:

• Get the stacked coverage;
• Leave coverage to the limits of the at-fault motorist’s policy;
• Decline having uninsured/underinsured motorists coverage at all.

If you already have uninsured/underinsured coverage when your policy comes up for renewal, you’ll automatically be signed up for the stacked option unless you opt out of it.

Unless Georgia is weirder than I realize (and with a disclaimer that I am neither a lawyer nor an insurance agent), the AJC didn’t do a good job explaining the change.

Generally, Uninsured/Underinsured Motorist coverage pays either (the difference between your limit and the at-fault driver’s limits), or (the amount of your loss, less whatever was paid from the at-fault driver’s insurance), whichever is greater.   So, if you suffer a carry $100,000 UM/UIM, and the at-fault driver only carries $25,000, the most that you will recover under UM/UIM is $75,000, the difference between the two limits.

I believe SB276 provides the option for your limits to be on-top-of the at-fault’s driver.   In my above example, if you have “stacked” $100,000 UM/UIM limits and are hit by a driver carrying $25,000 limits, you could recover up to $125,000.

Speaking from personal experience, in a serious accident, the auto insurance limits can be exhausted very quickly (especially if the other driver only has minimum limits).  The added UM/UIM coverage is generally cheap, and most folks think its a good buy.

I’m a little troubled by the use of the term “stacking”.  “Stacking” more commonly refers to the legal interpretation in some states that says if you pay a UM premium by vehicle, your UM coverages can be stacked one on top of the other to provide increased limits.   In other words, in some jurisdictions, if you buy $100k UM and have a 4 car policy, a judge may rule that you actually have $400k in coverage.  It’s a great feature for the consumer, but it’s also a potentially nasty surprise for the insurer if that added risk hasn’t been contemplated in its rates.

Over the weekend, the New York Times Magazine carried a Freakonomics article which looked at mileage-based auto insurance rating as a tool to promote energy conservation:

While economists may argue that gas is poorly priced, that imbalance can’t compare with how poorly insurance is priced. Imagine that Arthur and Zelda live in the same city and occupy the same insurance risk pool but that Arthur drives 30,000 miles a year while Zelda drives just 3,000. Under the current system, Zelda probably pays the same amount for insurance as Arthur.

While some insurance companies do offer a small discount for driving less — usually based on self-reporting, which has an obvious shortcoming — U.S. auto insurance is generally an all-you-can-eat affair. Which means that the 27,000 more miles than Zelda that Arthur drives don’t cost him a penny, even as each mile produces externalities for everyone. It also means that low-mileage drivers like Zelda subsidize high-mileage drivers like Arthur.[...]

Edlin and a few others, including Jason Bordoff and Pascal Noel at the Brookings Institution, have since done such research. It makes a compelling case that PAYD insurance would work well, reducing the carbon emissions, congestion and accident risk created by too much driving while leading drivers to pay the true cost of their mileage. Bordoff and Noel put the total social benefit at $52 billion a year.

PAYD insurance is no longer just an academic exercise. G.M.A.C. has begun using OnStar technology to offer mileage discounts, and next month Progressive will roll out a comprehensive PAYD plan called MyRate. Progressive, the huge Ohio-based insurer that has long prided itself as an innovator, will first offer the plan in six states, having run a similar pilot in three other states. Drivers who sign up for MyRate will install a small wireless device in their cars that transmits to Progressive not just how many miles they drive but also when those miles are driven and, to some extent, how they are driven: the device measures the car’s speed every second, from which Progressive can derive acceleration and braking behavior. Which means that Progressive will not only be able to charge drivers for the actual miles they consume but will also better assess the true risk of each driver.

It is an excellent article, not only catching the reason for the delays in implementation, but also catching one of the hidden consequences of Progressive’s program—that participation is voluntary, which will tend to mean that low-mileage drivers will participate, which, if the program reaches critical mass, means that the non-participating group should see rate inflation due to the group’s higher risk…or which will encourage adverse selection on competing insurers, by “encouraging” these higher risk customers to go elsewhere.

I love the idea of rating based on GPS data…especially when the measuring device (like Progressive’s) includes other meters measuring acceleration and g-force, providing additional data about how well the insured drives. With data like that, personal auto insurers could move away from…or at least deemphasize… more controversial rating variables, like credit, age, and (to a lesser extent) geography.

However, there are a few gotchas that I don’t think the article’s authors have fully contemplated:

• I am lead to believe that the technology and rating algorithms are currently patented. While some creativity can find ways around that, the threat of a big, ugly patent suit…or the need to pay a licensing fee to a tough competitor…is likely to discourage rapid adoption of the technology throughout the market.
   
• Progressive is phenomenal when it comes to slicing and dicing data. While there are a few other carriers with the talent, technology, and corporate philosophy to fully capitalize on such new information, small, mid-sized and even a few large carriers may not be nimble enough to use such data on their own…if they can even collect enough data to model off of (a potential problem for small insurers).
   
• I have to question whether some state regulatory agencies are ready to cope with such newfangled developments. While there are many great folks working at state DOIs, certain departments can be challenging, either due to the local political climate, or due to concerns inherent with new things. Heck, Massachusetts has only recently moved into the late 1980’s when it comes to auto insurance rating!
   
• Some consumer advocates tend to be extremely vocal about the nature of auto insurance costs. Specifically, the unfortunate tendency for the folks with the least disposable income being over-represented in the more expensive ends of different rating/underwriting variables. In most states, after all, auto insurance is mandatory, and folks generally believe that driving a car is a requirement for routine existence in much of the country.
   
  I could be mistaken, but my gut tells me that PAYD rating probably wouldn’t help, and might actually aggravate that phenomenon. Think about fewer cars per family leading to increased utilization; the increased likelihood of a disadvantaged insured working more than one job, or working at odd hours. And so forth.
   
• Whenever someone starts talking about insurance rating as a social tool, I start to get uncomfortable, as such interpretations invariably suggest infringing on the efficiency of the free market. There are plenty of free-market reasons to get excited about pay-as-you-drive. However, if society starts imposing inefficient requirements or constraints…you end up with a mess that privately-owned businesses really shouldn’t be underwriting.
   
• Having said that, the idea of using insurance rates rather than higher gas prices to incent average Americans to conserve is still very intriguing to me. However, I wonder if insurance rates are a less psychologically-effective tool than gas prices.
   
  After all, under a pay-as-you-drive system, you’re likely to see a bill once a month, reflecting your past driving behavior. Otherwise, you’re unlikely to be reminded that driving less, and driving efficiently saves you money.
   
  Gas prices, on the other hand, can be rather effective at jarring drivers into awareness. At least, it’s effective for me. Every time I drive past a gas price sign showing prices creeping closer to $4/gallon, I’m reminded that I really want to conserve to the greatest extent possible.

Seen in the Rocky Mountain News:

Democrats plan to introduce bills to require health insurance firms to get prior approval for rate hikes, punish them for improper denial of claims and encourage efficiencies.[...]

Rep. Morgan Carroll, D-Aurora, said insurance companies are allowed to increase rates at will and get approval from the Division of Insurance later. She said they are rarely punished if increases are found to be unjustified.

“This way, people will know they are getting good rates, they are getting what they paid for and costs will go down as they become more efficient,” she said.

Carroll said she is considering adding auto insurance in a separate measure.

House Speaker Andrew Romanoff, D-Denver, is sponsoring a bill that would impose penalties if a claim is improperly denied.

Since when has regulation promoted efficiency? It’s been my experience that the two concepts tend to be opposites.

A far greater incentive to become efficient…as well as providing better service…is the knowledge that your competitors might do just that, and they have the potential to quickly, easily reflect that in their rates, without having to be concerned about an inability to respond to trend in the future.

Besides, on the health insurance front, such moves seem doomed to have limited effect, seeing as how most Americans get their health coverage through plans which are federally regulated, exempt from state interference (for better or worse).

I’ve seen some discussion (e.g., InsureBlog, DiabetesMine, and Contingencies) on comparing the “mandatory-ness” of many of the quasi-universal health care proposals floating around in American political circles to the requirement in most states that drivers carry auto insurance as part of the conditions of driving a car.

Mandatory auto insurance is, after all, is either believed in, or is at least tolerated by, many (most?) Americans, so why shouldn’t a mandate to buy health coverage be accepted as well?

Like most of the commenters I’ve read, I agree that the analogy of health insurance being like auto insurance is flawed. Health insurance as we know it today is more analogous to a blend of both routine auto maintenance and auto insurance.

However, I prefer to approach the idea from a different direction:

• Every consumer of health care services should have the means to either pay for services received, or have the bills paid for them by a third party.
   
• If a would-be health care consumer is not able to pay for such services (or have the bill paid on his/her behalf), services shouldn’t be rendered.
   
• However, as a society, we are unwilling to be quite so…harsh. As a society, we believe that some level of medical care should be available to all.
   
  This is reflected in laws which generally prohibit ER’s from turning away anyone, and the availability of funds (via federal/state grants, and inflation of other patients’ bills) to foot the bills for indigent patients.
   
• Therefore, some mandate for citizens to have health insurance should exist…and in a sense, already does exist.

Q.E.D.
I’ve previously discussed why I’m on the fence as to whether auto insurance should be mandatory. For health insurance, the question is a heckuva lot easier in my mind—it already is mandatory, albeit in a rather inefficient, unexplicit manner.

The more interesting, and difficult-to-answer, questions in my mind are:

• What level of basic health care should be available to everyone?
   
• What is the most efficient way to fund that level of care?
   
• How can consumers be incented, and the system be operated, so that preventive or maintenance services are encouraged, but abuse of those services is discouraged?
   
• How can the cost for all this be kept from spiraling out of control?

The answers to those questions are, I think, rather interrelated…and, quite frankly, give me quite a headache when I seriously contemplate their magnitude.

Seen in Insurance Journal:

Overall, Fitch said it expects the new system will benefit both consumers and the marketplace. “Consumers will benefit the most from a wider choice in carriers, innovations in coverage and lower rates for the average consumer,” Fitch says.

However, Fitch maintains that Massachusetts insureds would benefit even more if underwriters were permitted to use credit scoring and other “actuarially significant pricing variables that are believed to adequately reflect risk and have demonstrated value in other markets.”

The state-imposed limits on so-called tiered pricing will discourage national carriers that do not now write in the Bay State from entering the market like they did in New Jersey, the report maintains. Until carriers are allowed to use sophisticated pricing models including credit scores, Fitch predicts that “the entrance of new participants will be more of a trickle than a flood.”

I agree the sentiment, but I suspect that Fitch doesn’t give sufficient weight to the political realities of the situation.

If Massachusetts had moved to complete deregulation without a phase-in, the market shock would have caused the same sort of public uproar which doomed the prior attempt at deregulation. And, considering the strength and attitude of Bay State consumer advocates, regulatory tolerance of features such as credit scoring would have lead to a legislative derailment of even this modest deregulation.

Yes, a fully deregulated marketplace would likely net consumers additional benefits…but any deregulation is better than failed deregulation.

Conning is making some interesting-sounding noise about their latest paper on the nonstandard auto market. From a Conning press release:

“As predictive modeling has become more prevalent in auto insurance underwriting, the standard auto market has expanded to include and price risks that would once have been thought of as nonstandard,” said Alan Dobbins, analyst at Conning Research & Consulting. “As a result, the new nonstandard market is undergoing a dramatic shift in risk profile.”

The Conning Research study, “The Nonstandard Auto Insurance Market: Evolutionary Challenges” reviews the recent history and performance of this market, and explores the forces shaping change in the segment.

A few of us have been expecting this for a while.

Back in the day, when I worked credit scoring, I was routinely asked why insurers love credit scoring.

Well, yes, there are the very basic goals of being able to increasingly differentiate among risks, and of having a new predictive rating/underwriting variable which is rather uncorrelated with other metrics we’ve traditionally relied upon.

However, I think the transition to credit-scoring based rating/underwriting during the late 90’s and the early part of this decade is more significant as a landmark highlighting actuaries and insurers starting to look at data in different ways.

With a lot of cheap computing power at our fingertips, potent statistical packages easily available to undertake the arcane mathematical incantations, it’s an exciting time to be working, if you like playing with data.

Credit scoring is a rather prominent milestone on the road to more sophisticated multivariate analysis of insurance data. Once we get beyond the mental/psychological roadblock of certain data not being intuitively related to insurance results…some pretty exciting things become possible.

To be honest, with the arsenal of data and modeling tools now available….well there are a few actuaries in the industry who probably wouldn’t mind seeing credit scoring go away, now that we have freedom to look at and manipulate data in pretty snazzy ways.

And that doesn’t just apply to auto, or even to just personal lines. Some of the models being built to evaluate commercial lines business are pretty darned cool, at least to those of us who enjoy this sort of thing.

I suspect that a nontrivial portion of the Massachusetts auto insurance buying public might be a little upset at the timing of the limited deregulation of Mass auto pricing. After all, with new rates generally taking effect on 1 April…well, if you had to reup your policy on 15 March, you might wish that reform could have come just a couple of weeks earlier.

Well, Commissioner Burnes is reminding folks that midterm cancellations are allowed. As seen in Insurance Journal:

Massachusetts car owners who want to see if they can get a better deal under the state’s new managed competition system may decide to opt out of their existing insurance plans early.

State regulators say car owners may want to see if they can lower their costs with the new rules. Under the old system the state set a single rate for all insurers. New competitve rates go into effect April 1.

But Insurance Commissioner Nonnie Burnes cautioned buyers that before canceling an existing policy, owners should find out if their insurer charges a fee for early cancellation.

Longtime readers know that I am no fan of insurance rate regulation. In a competitive and free market, market pressures will keep rates from getting too crazy. However, if society perceives a need to provide some protection/stability for certain folks for coverage they are obliged to buy…then I’m OK with rate regulation on the mandatory coverage, but still prefer anything excess of that to be subject to free market realities.

Amazingly, it seems some Georgia legislators agree with that stance, and Commissioner Oxendine’s not happy. From the AJC:

On Monday, a House subcommittee and later a committee agreed to tack an amendment onto a fairly innocuous Senate bill. The amendment would let insurers raise rates on all but the minimum required coverage without having to first get approval from State Insurance Commissioner John Oxendine.

On Thursday, the House passed the amended bill 141-3 with little discussion. The sponsor told his colleagues what the original bill did, but didn’t explain fully the changes and didn’t answer questions. Less than two hours later, the measure won final passage in the Senate 43-10 while insurance lobbyists stood outside, shaking hands.

The bill now heads to Gov. Sonny Perdue for his signature.[...]

Oxendine fears the change will propel Georgia back into the bad old days of the 1980s when the state’s drivers saw skyrocketing auto insurance premiums.

“The insurance industry wants to make the change because they want more profits,” Oxendine said. “I think rates will go up and I think Georgia consumers will pay for it.”

It’s a shame that the measure couldn’t have been passed sooner, before downward frequency trends started reversing themselves. Rates will start to naturally tick upward, which will play into the fear-mongering by the commissioner and consumer advocates.

However, a measure like this should allow insurers to feel comfortable backing off when trends flatten. And, if there’s concern about insurers seeking excess profits on the backs of Georgians…well, if there were excess profits to be made, you can be sure that some player or another will try to undercut any excessively profitable insurer, which should keep such concerns in check.

Bravo to the Georgia legislature for taking such an enlightened stance!

The Utah state legislature is apparently debating a measure which would increase the minimum limits drivers are required to carry on their auto insurance. The Salt Lake Tribune opines:

The change would boost rates 4 to 10 percent per year - $72 annually for the average policy - an increase that could prompt some low-income motorists who carry the minimum, including the newly married, college students and people on fixed incomes, to drop their insurance.

That would not only hurt insurance companies but would impact insured drivers who are involved in accidents with the uninsured. Utah law has aimed to keep all drivers insured, but this change would work to the contrary.[...]

We’re certain that legislators have heard stories about people with minimum coverage who have been involved in serious accidents and whose medical costs and repairs were not wholly covered.

But Utah law should not impose requirements to compensate victims of catastrophic accidents. Instead, the law should protect the vast majority, and as it is currently written, it does just that. No change is needed.

The editorial caught my eye, not only because the concept of mandatory auto insurance is interesting to consider, but also because it’s a subject that strikes close to home. (The medical bills alone for my wife’s car accident six years ago are six figures and counting.)

Minimum limits are nowhere near the amount required to compensate a victim of a serious crash, and I do find it a little galling that I have to purchase so much Underinsured Motorists coverage to protect myself from others unwilling to guarantee that they will make good on the damage they cause.

However, serious crashes are, thankfully relatively rare in the grand scheme of things, and ensuring that as many people as possible have the most basic coverage is surprisingly effective at reducing the total uninsured loss load.