1. SUVs and Automobile Insurance Costs SUV Drivers Have Different Underlying Liability Loss Costs Michael C. Dubin, FCAS, MAAA, MCA 1999 CAS Seminar on Ratemaking March 11 and 12 Opryland Hotel, Nashville

2. Why We’re Here n Vehicles on the road changing n Allegations that SUVs are more dangerous for passengers of other vehicles n Question liability rating plans that do not consider vehicle class

3. Topics of Discussion ¬ The changing market ­ “Ideal” characteristics of rating plans ® Options for including new rating variable ¯ Next steps for actuaries

4. ¬The Changing Market n Not much reflection of vehicle class in liability rates n Progressive, Farmers examples n Establish market niche or improve loss ratio n May not want to lead market n Soft market

5. Example n Protection of a program's financial soundness n Enhanced fairness n Economic incentive

9. ­Ideal Characteristics of Rating Plans n Statistical considerations n Operational considerations n Hazard reduction incentives n Public acceptability n Causality n Controllability

10. Statistical Considerations n Homogeneity, Credibility, Predictive Stability n Studies show more injuries to occupants in vehicles hit by SUVs than hit by cars n Studies shows more damage to vehicle hit by SUVs than hit by cars n Not fully explained by weight difference n Historically not needed n Original assumptions no longer valid

11. Statistical Considerations n Supported by data n Information is readily available n What data to use n How to model data n Not enough mature data

12. Insurance Institute for Highway Safety Fatality Rate by Weight Class of Other Vehicle For 3 Types of Other Vehicle

13. Operational Considerations n Expense (practicality and cost effectiveness) n Constancy, absence of ambiguity n Measurability and objectivity n Manipulation

14. Hazard Reduction Incentives n Believe auto makers are responsible for correcting incompatibility n Insurance industry dictates automobile safety n Mercedes-Benz n US Manufacturers n Crash tests

15. Public Acceptability n Afraid of upsetting customers n Regulatory issues n Public believes SUV have higher potential liability n Public believes that SUV owners should pay more for auto liability insurance n Customers think it is fair

16. Causality n Not a requirement for risk classification systems n Clear and relevant relationship to insured hazard

17. Controllability n Aware of dangers SUV’s pose to people in cars n Likely that liability rates will increase n Voluntarily increasing potential liability

18. ®Available Options for Incorporating Vehicle Class n Make SUV a rating variable n Rate SUV separately vs. cars n Add adjustment factor for certain vehicles n Generalized Linear Modeling could solve SUV issue and many others n Take advantage of increasing computer power

19. ¯Next Steps for Us Actuaries n Meets ratemaking criteria for adjusting class plan n Think of new ways to look at data n Decide whether data reveal iniquity in rates n If so, think of new ways to make rates n Consider underwriting, marketing and overall objectives