SUVs and Automobile Insurance Costs

SUV Drivers Have Different Underlying Liability Loss Costs

Michael C. Dubin, FCAS, MAAA, MCAMichael C. Dubin, FCAS, MAAA, MCA

1999 CAS Seminar on Ratemaking1999 CAS Seminar on Ratemaking

March 11 and 12March 11 and 12

Opryland Hotel, NashvilleOpryland Hotel, Nashville

Why We’re Here

Vehicles on the road changingVehicles on the road changing Allegations that SUVs are more dangerous Allegations that SUVs are more dangerous

for passengers of other vehiclesfor passengers of other vehicles Question liability rating plans that do not Question liability rating plans that do not

consider vehicle classconsider vehicle class

Topics of Discussion The changing marketThe changing market ““Ideal” characteristics of rating plansIdeal” characteristics of rating plans Options for including new rating variableOptions for including new rating variable Next steps for actuariesNext steps for actuaries

The Changing Market

Not much reflection of vehicle class in Not much reflection of vehicle class in liability ratesliability rates

Progressive, Farmers examplesProgressive, Farmers examples Establish market niche or improve loss ratioEstablish market niche or improve loss ratio May not want to lead marketMay not want to lead market Soft marketSoft market

Example

Protection of a program's financial Protection of a program's financial soundnesssoundness

Enhanced fairnessEnhanced fairness Economic incentiveEconomic incentive

SUV Class Non-SUV Class All ClassesNon-SUV Rating Company A

Insureds 500 500 1,000Average Premium 500 500 500Average Loss 450 350 400Average Expense 100 100 100Average Profit $ -50 50 0

% -10 10 0

Non-SUV Rating Company BInsureds 500 500 1,000Average Premium 500 500 500Average Loss 450 350 400Average Expense 100 100 100Average Profit $ -50 50 0

% -10 10 0

MARKET WITH SUV RATING

SUV Class Non-SUV Class All ClassesSUV Rating Company

Insureds 0 1,000 1,000Average Premium 550 450 450Average Loss 450 350 350Average Expense 100 100 100Average Profit $ 0 0 0

% 0 0 0

Non-SUV Rating CompanyInsureds 1000 0 1,000Average Premium 500 500 500Average Loss 450 350 450Average Expense 100 100 100Average Profit $ -50 50 -50

% -10 10 -10

SUV Class Non-SUV Class All ClassesSUV Rating Company

Insureds 500 1,000 1,500Average Premium 550 450 450Average Loss 450 350 350Average Expense 100 100 100Average Profit $ 0 0 0

% 0 0 0

Non-SUV Rating CompanyInsureds 500 0 500Average Premium 550 550 550Average Loss 450 350 450Average Expense 100 100 100Average Profit $ 0 100 0

% 0 18 0

Ideal Characteristics of Rating Plans Statistical considerationsStatistical considerations Operational considerationsOperational considerations Hazard reduction incentivesHazard reduction incentives Public acceptabilityPublic acceptability CausalityCausality ControllabilityControllability

Statistical Considerations Homogeneity, Credibility, Predictive StabilityHomogeneity, Credibility, Predictive Stability Studies show more injuries to occupants in Studies show more injuries to occupants in

vehicles hit by SUVs than hit by carsvehicles hit by SUVs than hit by cars Studies shows more damage to vehicle hit by Studies shows more damage to vehicle hit by

SUVs than hit by carsSUVs than hit by cars Not fully explained by weight differenceNot fully explained by weight difference Historically not needed Historically not needed Original assumptions no longer validOriginal assumptions no longer valid

Statistical Considerations

Supported by dataSupported by data Information is readily availableInformation is readily available What data to useWhat data to use How to model dataHow to model data Not enough mature dataNot enough mature data

Insurance Institute for Highway Safety

Fatality Rate by Weight Class of Other VehicleFor 3 Types of Other Vehicle

0

20

40

60

80

100

120

140

160

180

200

<2,500 2,500- 3,000- 3,500- 4,000- 4,500- 5,000+

Cars

Pickups

SUVs

Operational Considerations

Expense (practicality and cost effectiveness)Expense (practicality and cost effectiveness) Constancy, absence of ambiguityConstancy, absence of ambiguity Measurability and objectivityMeasurability and objectivity ManipulationManipulation

Hazard Reduction Incentives Believe auto makers are responsible for Believe auto makers are responsible for

correcting incompatibilitycorrecting incompatibility Insurance industry dictates automobile safetyInsurance industry dictates automobile safety Mercedes-BenzMercedes-Benz US ManufacturersUS Manufacturers Crash testsCrash tests

Public Acceptability Afraid of upsetting customersAfraid of upsetting customers Regulatory issuesRegulatory issues Public believes SUV have higher potential Public believes SUV have higher potential

liabilityliability Public believes that SUV owners should Public believes that SUV owners should

pay more for auto liability insurancepay more for auto liability insurance Customers think it is fairCustomers think it is fair

Causality

Not a requirement for risk classification Not a requirement for risk classification systemssystems

Clear and relevant relationship to insured Clear and relevant relationship to insured hazardhazard

Controllability

Aware of dangers SUV’s pose to people in Aware of dangers SUV’s pose to people in carscars

Likely that liability rates will increaseLikely that liability rates will increase Voluntarily increasing potential liabilityVoluntarily increasing potential liability

Available Options for Incorporating Vehicle Class

Make SUV a rating variableMake SUV a rating variable Rate SUV separately vs. carsRate SUV separately vs. cars Add adjustment factor for certain vehiclesAdd adjustment factor for certain vehicles Generalized Linear Modeling could solve SUV Generalized Linear Modeling could solve SUV

issue and many othersissue and many others Take advantage of increasing computer powerTake advantage of increasing computer power

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

objectivesobjectives