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Auto insurance risk selection
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Auto insurance risk
selection
Auto insurance risk selection is the process by which vehicle insurers determine
whether or not to insure an individual and what insurance premium to charge.
Depending on the jurisdiction, the insurance premium can be either mandated by
the government or determined by the insurance company in accordance to a
framework of regulations set by the government. Often, the insurer will have
more freedom to set the price on physical damage coverages than on mandatory
liability coverages.
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.[1] 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).[2][3]
History
Conventional methods [4] for determining costs of motor vehicle insurance
involve gathering relevant historical data from a personal interview with, or a
written application completed by, the applicant for the 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 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 vehicle 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; liability limits -
$100,000/$300,000/$50,000; deductibles - $500/$500.
A change to any of this information might result in a different 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 risk level.
Current insurance rating systems also provide discounts and surcharges for some
types of use of the vehicle, equipment on the vehicle 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 (e.g. The Club), and alarm system; and driver
type - good student, and safe driver (accident free); group - senior drivers
fleet drivers .
Telematic systems
Conventional rating systems are primarily based on past realized losses and the
past record of other drivers with similar characteristics. More recently,
telematic 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 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 is currently offering a type of telematic auto insurance in the
United Kingdom called Pay as You Drive. This system employs a combination global
positioning system (GPS) and cell phone in a car to monitor driving performance
and communicate risk factors to the insurance company. Drivers are offered a
discount if they exhibit safe driving. Trials conducted by Norwich Union in 2005
have found that young drivers (18 to 23 year olds) signing up for telematic auto
insurance have had a 20% lower accident rate than average. [5]
In the United States, Progressive Corporation is offering a form of telematic
auto insurance to residents of Minnesota called TripSenseTM. The TripSense
system consists of a black box that the driver plugs into their car's OBD-II
port. The black box monitors the mileage driven, speed, time of day and other
parameters, but not the car's location. The user then checks the black box once
a month on their home computer. The home computer tells them if they qualify for
a discount. If they do, they can download the information to the insurance
company and get the discount. If they don't they do not have to download the
information.
Other insurance companies are offering telematic auto insurance products in
Germany, South Africa, and Japan.
Patented risk selection systems
New 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 [6]by a major U.S. auto insurance company, Progressive
Auto Insurance us patent 5797134 and a Spanish independent inventor, Salvador
Minguijon Perez EU patent 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.
References
1. ^ McClenahan, Charles. Ratemaking (PDF). Casualty Actuarial Society.
Retrieved on 2006-05-11.
2. ^ What determines the price of my policy? (HTML). Insurance Information
Institute. Retrieved on 2006-05-11.
3. ^ How Are Auto Insurance Rates Calculated? (HTML). Countrywide Insurance
Services. Retrieved on 2006-05-11.
4. ^ U.S. Patent Application 20040153362 Bauer, Alan Rex; Burns, Kurtis Tavis;
Esposito, Michael Vincent; Huber, David Charles JR.; O'Malley, Patrick Lawrence;
"Monitoring system for determining and communicating a cost of insurance",
January 2004
5. ^ UK: Norwich Union launches innovative "Pay As You Drive"™ insurance with
prices from 1p per mile, Norwich Union press release, 05 October 2006
6. ^ Nowotarski, Mark, "Progressive Builds a Fortress of Patent Protection",
Insurance IP Bulletin, October 15, 2004
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