Auto insurance risk selection
When the premium is not mandated by the government, it is usually derived from the calculations of an actuary based on statistical data. The premium can vary depending on many factors that are believed to have an impact on the expected cost of future claims. Those factors can include the car characteristics, the coverage selected (deductible, limit, covered perils), the profile of the driver (age, gender, driving history) and the usage of the car (commute to work or not, predicted annual distance driven).
Conventional methods for determining costs of Auto Insurance involve gathering relevant historical data from a personal interview with, or a written application completed by, the applicant for the Auto Insurance and by referencing the applicant’s public motor vehicle driving record that is maintained by a governmental agency, such as a Bureau of Motor Vehicles. Such data results in a classification of the applicant to a broad actuarial class for which Auto Insurance rates are assigned based upon the empirical experience of the insurer. Many factors are deemed relevant to such classification in a particular actuarial class or risk level, such as age, sex, marital status, location of residence and driving record.
The current system of insurance creates groupings of vehicles and drivers (actuarial classes) based on the following types of classifications.
- Vehicle: Age; manufacturer, model; and value.
- Driver: Age; sex; marital status; driving record (based on government reports), violations (citations); at fault accidents; and place of residence.
- Coverage: Types of losses covered, liability, uninsured or underinsured motorist, comprehensive, and collision; liability limits; and deductibles.
The classifications, such as age, are further broken into actuarial classes, such as 21 to 24 year olds, to develop a unique vehicle insurance cost based on the specific combination of attributes for a particular risk. For example, the following information would produce a unique Auto Insurance cost:
- Vehicle: Age – 7 years old; manufacturer, model – Ford, Explorer XLT; value $ 18,000
- Driver: Age – 38 years old; gender – male; marital status – single; driving record (based on government reports) violations – 1 point (speeding); at fault accidents – 3 points (one at fault accident); place of residence 33619 (zip code)
- Coverage: Types of losses covered; liability – yes; uninsured or underinsured – no; motorist comprehensive – yes; collision – yes; Auto Insurance Liability Limits – $100,000/$300,000/$50,000; deductibles – $500/$500.
A change to any of this information might result in a different Auto Insurance Premium being charged if the change resulted in a different actuarial class or risk level for that variable. For instance, a change in the drivers’ age from 38 to 39 may not result in a different actuarial class because 38 and 39 year old people may be in the same actuarial class. However, a change in driver age from 38 to 45 may result in a different premium because the records of the insurer indicate a difference in risk associated with those ages and, therefore, the age difference results in a change in actuarial class or assigned level.
Current Auto Insurance rating systems also provide discounts and surcharges for some types of use of the Auto, equipment on the Auto and type of driver. Common surcharges and discounts include:
- Surcharges: Business use.
- Discounts: Safety equipment on the vehicle airbags, and antilock brakes; theft control devices passive systems and alarm system; and driver type – good student, and safe driver (accident free); group – senior drivers.
Usage Based Insurance
Conventional rating systems are primarily based on past realized losses and the past record of other drivers with similar characteristics. More recently, electronic systems have been introduced whereby the actual driving performance of a given driver is monitored and communicated directly to the insurance company. The insurance company then assigns the driver to a risk class based on the monitored driving behavior. An individual, therefore, can be put into different risk classes from month to month depending upon how they drive. For example, a driver who drives long distance at high speed in one month might be placed into a high risk class for that month and pay a large Auto Insurance premium. If the same driver drives for short distances at low speed the next month, however, then he or she might be placed into a lower risk class and charged a lower premium.
Norwich Union offered a type of telematic Auto Insurance in the United Kingdom, discontinued in 2008, called Pay as you Drive. This system employed a combination global positioning system (GPS) and cell phone in a car to monitor driving performance and communicate risk factors to the Auto insurance company. Drivers were offered a discount if they exhibited safe driving as Norwich defined it. Trials conducted by Norwich Union in 2005 found that young drivers (18 to 23 year olds) signing up for telematic Auto Insurance had a 20% lower accident rate than average.risk selection methods may be patentable to a greater or lesser degree depending upon the patent laws of various countries. These patents are generally described as business method patents. The United States is fairly liberal in granting business method patents. Europe is fairly conservative.
Different forms of telematic auto insurance, for example, were independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance us 5797134 and a Spanish independent inventor, Salvador Minguijon Perez EU 700009. The Progressive patents cover the use of a cell phone and GPS to track movements of a car. The Perez patent covers monitoring the car’s engine control computer to determine distance driven, speed, time of day, braking force, etc. Ironically, Progressive is developing the Perez technology in the US and Norwich Union is developing the Progressive technology for Europe under a license from Progressive. Progressive does not have to get a license to the Perez patent since it was never filed in the US.
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07/19/2014