Auto insurance risk selection
Encyclopedia
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. 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).
The current system of insurance creates groupings of vehicles and drivers (actuarial classes) based on the following types of classifications.
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:
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:
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 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 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.
In the United States
, Progressive Corporation
has an auto insurance program called MyRate. The program gives drivers a customized insurance rate based on how, how much, and when their car is driven. MyRate is currently available in Alabama
, Kentucky
, Louisiana
, Michigan
, Minnesota
, Maryland
, New Jersey
and Oregon
. Driving data is transmitted to the company using an on-board device. The device connects to a car's OnBoard Diagnostic (OBD-II) port (all automobiles built after 1996 have an OBD-II.) and transmits speed, time of day and number of miles the car is driven. There is no GPS in the MyRate device, so no location information is collected. Cars that are driven less often, in less risky ways and at less risky times of day can receive large discounts. Progressive has received patents on its methods and systems of implementing usage-based insurance and has licensed these methods and systems to other companies. Progressive has service marks pending on the terms Pay As You Drive and Pay How You Drive.
Other insurance companies are offering telematic auto insurance products in Germany
, South Africa
, and Japan
.
able to a greater or lesser degree depending upon the patent laws of various countries. These patents are generally described as business method patent
s. 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
and a Spanish independent inventor, Salvador Minguijon Perez . 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.
Vehicle insurance
Vehicle insurance is insurance purchased for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage and/or bodily injury resulting from traffic collisions and against liability that could also arise therefrom...
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
Actuary
An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms ....
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
Deductible
In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...
, limit, covered perils), the profile of the driver (age
Ageing
Ageing or aging is the accumulation of changes in a person over time. Ageing in humans refers to a multidimensional process of physical, psychological, and social change. Some dimensions of ageing grow and expand over time, while others decline...
, gender
Gender
Gender is a range of characteristics used to distinguish between males and females, particularly in the cases of men and women and the masculine and feminine attributes assigned to them. Depending on the context, the discriminating characteristics vary from sex to social role to gender identity...
, driving history) and the usage of the car (commute to work or not, predicted annual distance driven).
History
Conventional methods 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 codeZIP CodeZIP codes are a system of postal codes used by the United States Postal Service since 1963. The term ZIP, an acronym for Zone Improvement Plan, is properly written in capital letters and was chosen to suggest that the mail travels more efficiently, and therefore more quickly, when senders use the...
) - Coverage: Types of losses covered; liability - yes; uninsured or underinsured - no; motorist comprehensive - yes; collision - yes; liability limits - $100,000/$300,000/$50,000; deductibleDeductibleIn an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...
s - $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
Assigned risk
Assigned risk means a driver of a motor vehicle, or a class of such drivers, who would be denied insurance coverage by insurance companies, but are required to be covered under U.S. state law...
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 ClubThe Club (automotive)The Club is the trademark version of a popular automotive steering wheel lock, produced by Sharon, Pennsylvania-based Winner International. The company was formed in 1986 for the purpose of marketing the device. The inventor, James E...
), and alarm system; and driver type - good student, and safe driver (accident free); group - senior drivers fleet drivers .
Usage Based Insurance
Norwich Union
Norwich Union
Norwich Union was the name given to insurance company Aviva's British arm before June 2009. It was originally established in 1797. It is the biggest life insurance provider in the United Kingdom, and has a strong position in motor insurance...
offered a type of telematic auto insurance in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
,discontinued in 2008, called Pay as You Drive
PAYD
Usage based insurance, also known as pay as you drive and mile-based auto insurance is a type of automobile insurance whereby the costs of motor insurance are dependent upon type of vehicle used, measured against Time, Distance and Place....
. This system employed a combination global positioning system
Global Positioning System
The Global Positioning System is a space-based global navigation satellite system that provides location and time information in all weather, anywhere on or near the Earth, where there is an unobstructed line of sight to four or more GPS satellites...
(GPS) and cell phone in a car to monitor driving performance and communicate risk factors to the 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.
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, Progressive Corporation
Progressive Corporation
The Progressive Corporation , known as the Progressive Casualty Insurance Company through its subsidiaries, provides personal automobile insurance, and other specialty property-casualty insurance and related services in the United States....
has an auto insurance program called MyRate. The program gives drivers a customized insurance rate based on how, how much, and when their car is driven. MyRate is currently available in Alabama
Alabama
Alabama is a state located in the southeastern region of the United States. It is bordered by Tennessee to the north, Georgia to the east, Florida and the Gulf of Mexico to the south, and Mississippi to the west. Alabama ranks 30th in total land area and ranks second in the size of its inland...
, Kentucky
Kentucky
The Commonwealth of Kentucky is a state located in the East Central United States of America. As classified by the United States Census Bureau, Kentucky is a Southern state, more specifically in the East South Central region. Kentucky is one of four U.S. states constituted as a commonwealth...
, Louisiana
Louisiana
Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state in the U.S. with political subdivisions termed parishes, which are local governments equivalent to counties...
, Michigan
Michigan
Michigan is a U.S. state located in the Great Lakes Region of the United States of America. The name Michigan is the French form of the Ojibwa word mishigamaa, meaning "large water" or "large lake"....
, Minnesota
Minnesota
Minnesota is a U.S. state located in the Midwestern United States. The twelfth largest state of the U.S., it is the twenty-first most populous, with 5.3 million residents. Minnesota was carved out of the eastern half of the Minnesota Territory and admitted to the Union as the thirty-second state...
, Maryland
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
, New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
and Oregon
Oregon
Oregon is a state in the Pacific Northwest region of the United States. It is located on the Pacific coast, with Washington to the north, California to the south, Nevada on the southeast and Idaho to the east. The Columbia and Snake rivers delineate much of Oregon's northern and eastern...
. Driving data is transmitted to the company using an on-board device. The device connects to a car's OnBoard Diagnostic (OBD-II) port (all automobiles built after 1996 have an OBD-II.) and transmits speed, time of day and number of miles the car is driven. There is no GPS in the MyRate device, so no location information is collected. Cars that are driven less often, in less risky ways and at less risky times of day can receive large discounts. Progressive has received patents on its methods and systems of implementing usage-based insurance and has licensed these methods and systems to other companies. Progressive has service marks pending on the terms Pay As You Drive and Pay How You Drive.
Other insurance companies are offering telematic auto insurance products in Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
, and Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
.
Patented risk selection systems
New risk selection methods may be patentPatent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
able to a greater or lesser degree depending upon the patent laws of various countries. These patents are generally described as business method patent
Business method patent
Business method patents are a class of patents which disclose and claim new methods of doing business. This includes new types of e-commerce, insurance, banking, tax compliance etc. Business method patents are a relatively new species of patent and there have been several reviews investigating the...
s. 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
Progressive Corporation
The Progressive Corporation , known as the Progressive Casualty Insurance Company through its subsidiaries, provides personal automobile insurance, and other specialty property-casualty insurance and related services in the United States....
and a Spanish independent inventor, Salvador Minguijon Perez . 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
Norwich Union
Norwich Union was the name given to insurance company Aviva's British arm before June 2009. It was originally established in 1797. It is the biggest life insurance provider in the United Kingdom, and has a strong position in motor insurance...
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.