1. Auto insurance chapter 13

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. Medical Payments Coverage –In no-fault states: Personal injury protection (PIP) Often compulsory Also provides limited loss of income coverage

9. 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

10. 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

11. Auto Insurance Price Increases

12. Average Auto Insurance Expenditures by State

13. Rating Factors –Driver characteristics Age Gender Marital status Use of the auto Number of autos Other factors –Driving Record –Territory: congestion, weather, crime

14. Bodily Injury Claim Frequency

15. Restrictions on Rating Factors –Examples Gender Marital status Use driving experience instead of age (MA) Territory

16. 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

17. 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

18. 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

19. 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

20. 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. Page 1A

21. Teen drivers 10% of fatalities were under age 18 Missouri is the 44 th state with graduated licenses Source: St. Louis Post-Dispatch, September 5, 2000

22. 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.

23. Drivers Education Johns-Hopkins study –For teenage drivers, driver’s education does NOT Reduce accidents Reduce tickets –Source: Kansas City Star, September 24, 2000

24. 2001's Top 100 Most Stolen Vehicles Report for the United States Source: CCC Information Services Inc. RankYearMakeModel-Name 11991TOYOTACAMRY 21989TOYOTACAMRY 31990TOYOTACAMRY 42000HONDACIVIC SI 51994CHEVROLETC1500 4X2 61995HONDAACCORD EX 71994HONDAACCORD LX 81994HONDAACCORD EX 91988TOYOTACAMRY 101996HONDAACCORD LX 111993CHEVROLETC1500 4X2 121997FORDF150 4X2 131990HONDAACCORD EX 141991HONDAACCORD LX 151996HONDAACCORD EX 161987TOYOTACAMRY 171997HONDAACCORD LX 181992HONDAACCORD LX 191991HONDAACCORD EX 201993JEEPGRAND CHEROKEE 4X4

25. 2001's Top 25 Most Stolen Vehicles Report for Texas Source: CCC Information Services Inc. RankYearMakeModel-Name 11994CHEVROLETC1500 4X2 21993CHEVROLETC1500 4X2 31997FORDF150 4X2 42000CHEVROLETC1500 4X2 SILVERADO 51995CHEVROLETC1500 4X2 62001DODGEBR1500 4X2 71996CHEVROLETC1500 4X2 81997CHEVROLETC1500 4X2 92000FORDF150 4X2 101998FORDF150 4X2 XL 112001FORDF150 4X2 122000FORDMUSTANG 131991CHEVROLETC15 4X2 EXTENDED CAB FLEETSIDE 141998FORDMUSTANG 151992CHEVROLETC15 4X2 FLEETSIDE 161995HONDAACCORD EX 171999CHEVROLETC1500 4X2 SILVERADO 181994GMCC1500 4X2 191995FORDF150 4X2 202000HONDACIVIC SI 211992CHEVROLETC15 4X2 EXTENDED CAB FLEETSIDE

26. 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, 2000Kristen Gerencher

27. 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

28. 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

29. Residual Market Share by State

30. 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

31. 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)

32. 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

33. 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

34. 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)

35. 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

36. 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

37. 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”

38. Effect of No-fault on Premiums Depends on –Limitations on tort liability –Level of mandatory PIP coverage