L26 – Spring 2011 Module 1 1

L26: Automobile Insurance

Objective: Illustrate contract characteristics through auto insurance policy

L26 – Spring 2011 Module 1 2

What can be lost?

• Bodily Injury

• Property Damage/Theft

• Liability (Negligence)

L26 – Spring 2011 Module 1 3

Types of coverage

• Personal Auto Policy (PAP)- a package policy for four coverage

– “Third-party” Liability coverage– “First-party” Medical payments coverage– Uninsured and underinsured motorists coverage– Damage and other losses to autos

L26 – Spring 2011 Module 1 4

Third Party Liability Coverage

• Bodily injury or property damage because of an auto accident

• Who is insured?– Named insured (stated clearly on the dec page)

• Owner, resident spouse, family members and other person have the permission of the owner

Scenario 1: Suppose you are insured under your PAP, if you used other people’s car with permission and incurred losses,

Covered under your PAP?

• Covered autosScenario 2: Suppose your car is the covered auto under your

PAP, your friend used your car with your permission and incurred losses, Covered under your PAP?

L26 – Spring 2011 Module 1 5

Liability coverage (cont’)• Limit of liability

– Single limit• Specifies the maximum amount that the insurer will pay for all

damages from a single accident– Split limit (100,000/300,000/50,000)

• 100,000: per person for bodily injury• 300,000:per accident for bodily injury• 50,000: per accident for property damage

• Exclusions and “other insurance” provisions– Intentional injury or damage– Losses to property, which often are covered under homeowners

insurance– Bodily injury to an employee covered by WC– Vehicles used without owner’s permission

L26 – Spring 2011 Module 1 6

First-party medical payments coverage

• Payments regardless of fault

Note: in no-fault states, PIP (personal injury protection) is often compulsory, which also provides limited loss of income coverage. (Limit is relatively low)

• Could collect twice from your group or individual medical / disability /life insurance

L26 – Spring 2011 Module 1 7

Uninsured/underinsured motorists coverage

• Coverage if liable party has no or insufficient coverage• Coverage for all damages that otherwise would have

been paid• Compulsory in many states• What to be covered?

– Medical expenses– Lost income– Pain and suffering

L26 – Spring 2011 Module 1 8

Physical Damage and other losses to Autos

• Collision coverage– Covers the upset (rollover) of a covered auto or impact

with another objective– Regardless of the responsibility

• Other-than-collision (comprehensive)– Covers damage from

Falling objects, explosions, glass breakageEarthquake, windstorms, hailContact with an animal (Deer)Theft

• Deductibles generally used for both

L26 – Spring 2011 Module 1 9

Financial responsibility laws• Penalize negligent drivers who cannot pay

minimum payment amount

• All states have such laws

• Purchasing liability insurance with limits equal to or greater than the minimum specified in a state’s financial responsibility laws satisfies the law

• E.g. WI – FR only, license revocation

L26 – Spring 2011 Module 1 10

Compulsory liability insurance law

The laws that mandate the purchase of a minimum amount of auto liability coverage by auto owners.

e.g. GA mandatory, penalties up to $1000 fine and maximum 1 yr jail.

L26 – Spring 2011 Module 1 11

No-fault laws

• First party coverage– Coverage of the insured's own property (e.g., fire

insurance, collision and comprehensive coverage of auto insurance) or person (life and health), as opposed to coverage for liability to others.

• Mandatory PIP( Personal Injury Protection) coverage -- Medical expense and lost wages

• Can’t sue unless exceed “threshold” e.g. sue for general damages• Ex: Minnesota

L26 – Spring 2011 Module 1 12

No-fault vs. WC

L26 – Spring 2011 Module 1 13

Advantages/Disadvantages of no-fault

• Advantages – More efficient compensation system

• Less pain and suffering compensation• Faster compensation• Lower legal costs

• Disadvantages– Reduces safety and boost the costs

– Not fair

L26 – Spring 2011 Module 1 14

Choice no-fault & Add-on no-fault

Choice no-fault• Drivers have the option to choose a no-fault

policy or a tort liability policy• Ex: New Jersey Add-on no-fault benefits• In addition to PIP, a policy provision that adds

no-fault benefits, where permitted, to automobile liability coverage without restricting the right of the victim to sue the wrongdoer, such as suing for pains and sufferings

L26 – Spring 2011 Module 1 15

Pricing

• Price determination/rating factors– Driving record– Location– Age/gender– Car make/model– Amount of coverage– Use of car

L26 – Spring 2011 Module 1 16

China vs. US • Price determination/rating factors Focus on the car itself, NOT on the insured!

Price adjustment when renewing the policy relies on # of accidents, regardless severity.

“上年没有发生车险赔款的，续保时可打 9 折；连续 2 年无赔款，可打 8 折；连续 3 年及以上无赔款，可打 7 折。反之，如果上年发生 5 次及 5 次以上赔款，保费则要上浮 3 成；上年发生 4 次赔款，上浮 2 成；上年发生 3 次赔款，上浮 1 成；新保或上年发生 3 次以下赔款则维持基本费率”

( 10% off when renewing the policy if no claims in the previous year. 20% off if no claims in the past two years, 30% off if no claims in the past three years.

30% more if >=5 claims in the previous year, 20% more if 4 claims, 10% more if 3 claims, remain the same if <3 claims. )

L26 – Spring 2011 Module 1 17

How can high-risk people obtain coverage?

• Residual markets Ensure access to insurance– Provide insurance at a regulated price to those

who otherwise would find it difficult to buy insurance

• Types of auto insurance residual market– Assigned risk pools– Reinsurance facilities– Joint underwriting associations– State insurer

L26 – Spring 2011 Module 1 18

Assigned risk plans

• Most states

• Applicants are assigned to insurers in proportion to their market share

• Insurer receives the (regulated) premium and pays claims

L26 – Spring 2011 Module 1 19

Reinsurance facilities

• Each insurer sells to all applicants• Insurer can reinsure unwanted insureds to state

reinsurer

e.g. South Carolina• Deficit of reinsurer paid:

- by all insurers in proportion to their market share

- by all policyholders (recoupment fee)

L26 – Spring 2011 Module 1 20

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

e.g. Missouri

L26 – Spring 2011 Module 1 21

State insurer

• Deficit is paid by all insurers in proportion to their market share

e.g. Maryland