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