This text has provided discussions regarding the legal aspects of a Personal Automobile Policy and policy provisions. As indicated in the discussions of Contracts, the consideration for an insurance policy is the premium paid by the policyholder to the insurer. Premiums are calculated differently by types of insurance, e.g. for life insurance premiums are obtained from tables by sex, age, smoking status, etc. For automobile insurance, premiums are more complicated for an agent because of the various types, age, replacement values and use of vehicles, driving record, specific coverage, geographical area and other factors that may apply.
In automobile insurance, premiums are determined by published rates, which is defined as the cost of a unit of insurance. The premium is determined by multiplying the base rate by the applicable rating factor.
The premium is determined from the base rate which are published rates for each specific coverage, such as bodily injury and property damage. An example might be the base rate of $250 for auto liability coverage of $250,000. This would be considered as a base rate.
If the insured/applicant’s driving record is not good, a rating factor will be used. Example might be a rating factor of 1.5 for a particular individual because of the driving record. Therefore, the $250 base rate would be multiplied by 1.5 for a premium of $375. This would be the premium.
As is obvious, the premiums for auto insurance depends upon the “rates.” Rates are determined by statistical rating bureaus based upon a very large and broad statistical database of loss and expense experience. Rates are affected by many other factors, such as governmental regulation and public policy.
From the viewpoint of regulations, any rates must be
Reasonable Rates: The reasonableness of rates can be determined by the earnings of the property-liability companies. Historically, these earnings have not been large as the costs or repair and replacement of automobiles has increased disproportionately because of jury awards, the cost of replacement of technology, and increasing company expenses.
Adequate Rates. Since insurance is regulated by the individual states, and since most Insurance Commissioners are political, rate increases are not popular so many Insurance Departments are more concerned as to whether they are “reasonable.” Most states now have state guaranty funds supported by mandatory insurance company contributions that help to guaranty adequacy to some degree.
Non - Discriminatory Rates. Discrimination in rate-making does not necessarily refer to race discrimination, but that they do not unfairly discriminate in any fashion. Since factors such as age, sex and marital status are important and relevant to rate-making, insurers continue to make the case that this is not unfair discrimination but an essential part of determining the proper premium. Unfortunately some states have eliminated, or tried to eliminate, rate classifications based on these factors.
Automobile rates are based upon “classes” as a result of similar exposures grouped together, and the rates used for each group are therefore charged to each member of the group (spread of risk). If an insurer charged different rates within each “class”, that would be considered as “unfair” discrimination by the Insurance Departments. The “Classes” in most states are as follows:
Younger drivers drive more miles, drive faster and have more losses, both in number and in severity. Statistics reveal that these traits seem to start at around age 18 and continue through age 28 or age 30, a principal reasons for the decrease in losses can be attributed to more experience in driving.
Females as a general rule have lower rates than males. The reasons are many, but include the fact that young males have more interest in racing and taking unnecessary chances, young married women are less likely to be in the workforce and therefore not in heavy commuter traffic (although this is changing) and when couples travel, usually the male does the driving.
The average cost of claims vary widely from location to location. One area might concentrate on making highways safer, or autos safer through vehicle inspections. Other areas may strictly enforce traffic laws leading to fewer accidents. Insurers generally use the location of where the vehicle is garaged, but there is a trend to base rates on where the auto is primarily used.
Single drivers are more inclined to use their automobiles at night than married persons, and often includes alcohol or entertainment. They also have more of a tendency to drive high-performance vehicles. The difference in losses between married and unmarried female drivers is less than between married and single male drivers.
There are other factors than can make a difference in rating automobile insurance:
Under certain types of Driver Education, discounts may apply for those successfully completing a Driver Education course.
Some company allow discounts for those students who maintain a B average or above consistently.
If a family has more than one automobile, a discount is usually given because insuring more than one auto on the same family has lower expenses, and usually the cars are driven less.
Those with a good driving record can receive a discount in premiums. However if losses occur later, the insured can lose the discount for a period of time (usually three years) without losses. Some insurers charge “points” against tickets for moving violations and accidents.
Some states allow payment of premiums on an “installment” basis. As an example, Georgia allows this payment method, however they require “Premium Payment Plan Examples”, which list
“If the Total Policy Premium is: (amounts $100 to $1000)
“And You Put Down: (amounts of $30, $50, $75, $100, $150, $200 and $250)
“The Balance Subject To FINANCE CHARGE Will Be: (2d column subtracted from 1st
column)
“The Total Number of Monthly Installments Will Be: (from 3 months to 10 months)
“The Monthly Installment Before Adding the Finance Charge Will Be: (amount)
“The Total FINANCE CHARGE For All Installments Will Be: (amount)
“And The Total Deferred Payment Price Will Be: (amount)”
It is apparent that the consumer will be provided with all of the information should they chose this method of premium payment. The interest charge will vary, but in Georgia, for instance, it is 1.25% per month on the unpaid balance, or 15% annual percentage rate. It is essential that, in those states that allow installment premium payments of this type, that the applicant be made aware of the interest charges before they apply for the insurance.
For a Personal Automobile Insurance policy, Rating information – the categories that determine the premium for a policy – varies by state and by company. The following Rating Information resembles that offered by one of the leading Automobile insurance companies. Each rating class is further categorized by individual or family policy and whether farm use or not.
PLEASE REFER TO THE “RATING MANUAL” SECTION FOR FURTHER DETAILS
RATING INFORMATION
(Pleasure use, Business use, Commuting, and Ages of Operators)
The premiums your policy are based principally on the use of the car and the ages of the regular operators
The principal rating factors are shown below and the corresponding RATING CLASS numbers are shown under RATING CLASS on the policy.
A. RESIDENT STUDENTS ‑ Youthful unmarried occasional operators away at school over 100 miles from the place of principal garaging of the car are classified as RESIDENT STUDENTS.
B. CAR POOL X DISCOUNT ‑ Automobiles used in Car Pools for driving to or from work on less the a daily basis will be classified as follows:
1. Cars in the "commuting 3 or more but less than 10 miles" classifications shall be classified as commuting “less than 3 miles" if the total usage of the car in driving to or from work is not more than two days per week or not more than two weeks per each five week period,
2. Cars. in the "commuting 10 or more miles" classifications shall be classified as “commuting 3 or more but less than 10 miles" if the total usage of the car in driving to or from work is not more than two lays per week or not more than two weeks per each five week period.
Rating Class
01, 07 Pleasure use ‑ no youthful operators ‑ commuting less than 3 miles one way –
principal operator age 50-64.
02, 08 No Youthful operators ‑ commuting 3 or more but less than 10 miles one way ‑
principal operator age 50‑64.
03, 09 No youthful operators ‑ commuting 10 or more miles one way ‑ principal operator
age 50-64.
04, 05* Business use ‑ no youthful operators ‑ principal operator age 50‑64.
11,24 Pleasure use ‑ no youthful operators ‑ commuting less than 3 miles one way - no
principal operator over age 49.
12, 25 No youthful operators, commuting 3 or more but less than 10 miles one way - no
principal operator over age 49.
13, 26 No youthful operators ‑ commuting 10 or more miles one way ‑ no principal
operator over age 49.
(Classes 11, 12, 13 may include an unmarried female Resident Student under age 25)
15 Farm use ‑ no youthful operators ‑ no commuting use ‑ no principal operator
age 65 or over.
20, 27* No youthful operators ‑ commuting less than 3 miles one way ‑ uses auto less
than 7500 miles annually ‑ no principal operator over age 49.
22, 28* No youthful operators ‑ commuting 3 or more but less than 10 miles one way ‑
uses auto less than 7500 miles annually ‑ no principal operator over age 49.
30, 98* Business use ‑ no youthful operators ‑ no principal operator over age 49.
36, 56** Unmarried female occasional operator under 21 years of age.
37, 57** Unmarried female principal operator under 21 years of age.
38, 58** Unmarried female occasional operator 21‑24 years of age.
39, 59**Unmarried female principal operator 21‑24 years of age.
46, 48* No youthful operators ‑ commuting less than 3 miles one way – uses auto less
than 7500 mile annually, ‑ principal operator age 50‑64.
47, 49* No youthful operators ‑ commuting 3 or more but less than 10 miles one way‑
uses auto less than 7500 miles annually ‑ principal operator age 50‑64.
51, 55** Unmarried male principal operator age 25‑29.
52,53** Unmarried male principal operator age 25‑29 insured with this company for 40
months without any accidents or convictions.
60, 99** Business use ‑ no youthful operators ‑ there is a principal operator age 65 or
over.
61, 67* Pleasure use ‑ no youthful operators ‑ commuting less than 3 miles one way –
there is a principal operator age 65 or over.
62, 68* No youthful operators ‑ commuting 3 or more but less than 10 miles‑there is a
principal operator age 65 or over.
63,69* No youthful operators ‑ commuting 10 or more miles one way – there is a principal
driver age 65 or over.
65 Farm use ‑ no youthful operators ‑ no commuting use ‑ there is a principal operator
age 65 or over..
81, 85** Unmarried male occasional operator under 21 years of age.
82, 86** Unmarried male operator under 21 years of age or unmarried male RESIDENT
STUDENT under 21 years of age
83, 87** Unmarried male principal operator under 21 years of age.
91, 95** Unmarried male occasional operator 21‑24 years of age.
92, 96** Unmarried male operator 21‑24 years of age or unmarried male RESIDENT
STUDENT 21 - 24 years of age.
93, 97** Unmarried male principal operator 21‑24 years of age.
*Homeowner, all adult operators are accident free and motor vehicle violation conviction free for 40 months. However, if the policy has been in force for 36 months, one minor motor vehicle violation by an adult operator.
For new and renewal multi‑car policies, one minor motor vehicle violation by an adult, operator is permitted. Or, if the policy has been in force for 60 months, one accident by an adult operator is permitted.
Only one of these exceptions may apply to the policy.
**Automobile also has a farm use.
The actual procedure of arriving at a premium for a particular policy in this technological age, is simply entering the required information into a computer, and then, suddenly and mysteriously (if the program is working correctly), the applicable premium appears.
The basic information that is entered has been discussed earlier. Various companies and various policies require various other information. The insurance company’s application provides the necessary information to initiate the rating procedure. During the underwriting process, if additional information is uncovered – such as an inspection report that reveals that there is an additional youthful driver in the family, or a check of Motor Vehicle Records shows an unreported traffic citation – this information is entered into the program and the appropriate premium is developed.
Analogous to the importance of knowing what data. (and why) goes into determining premiums, consider the fact that just as computers and calculators have the ability to perform mathematical functions far beyond the abilities of their operators (in most cases), it is still necessary for the operators to be able to understand basic math. For instance, a spread sheet program allows for functions to be entered to provide certain statistics, but in order for the formula to be accurate, there must be a basic knowledge of what is needed. As an example, if a number in a specified cell (such as A1), is to be increased by 5% in the next cell and subsequent cells, the operator would enter a formula that would state in effect: Multiply the number in cell A1 by 1.05 and show it in cell A2. Do the same for the next 8 cells in this row.” The operator must know enough math to be aware that in order to arrive at the needed number, there must be a multiplication function, and that that function would be (A1) times 1.5.
Therefore, in order to understand how the computers arrive at the premium, a discussion of the factors and procedures is needed. One may ask why go through all of this detail. The answer is that to be a good driver, one must know more than turn on the key, push on the accelerator, turn the wheel, and put your foot on the brake to stop. In the same vein, a good insurance agent must know how the premiums are determined for each policy, which allows them to answer the customer’s questions and further emphasizes the necessity of reporting all of the appropriate and applicable information to the insurance company.
Before the discussion of the rating procedure, if one is not or never has been personally involved in the calculation of premiums or has not studied the subject in detail, a practical question arises: If the information contained in computers (or Rate Manuals) is used by all automobile insurers, why is it that premiums vary for the same identical risks, company by company? (For purposes of this discussion, “Rate Manual” may be construed to also mean the information [data] contained in the computer programs from which the applicable premiums are derived.)
Some insurance companies may use the same basic data as one down the street, but their premiums can be substantially lower. The companies that use the premiums as determined by using the statistics contained in the Rate Manual are called, for obvious reasons, Manual Rates Companies. Many, if not most, companies will vary from the Manual Rates and will “deviate” from the rates by some factor. Keep in mind that all premiums must be approved by the various Departments of Insurance, and the company actuaries must be able to prove to the insurance departments that the rates meet their requirements (see above) and that the company will be able to write auto insurance in their state at the supplied premiums, and be able to show enough profit so that the company will not bankrupt itself, or withdraw from the state, leaving irate policyholders without coverage.
As discussed earlier, the company must support their rates by using statistical data, the basis of the Rate Manual as provided by the Insurance Service Office, and/or the company’s own experience, or the experience of a company so similar that any deviation from the Manual Rates can be illustrated, and subsequently approved.
As examples, consider a national company, operating in the majority of the states, that has been in business for 50 years, and is one of the top 5 auto insurance companies in respect to premium in the country. This company would, in all likelihood be a top “Rated” company. Therefore, if their own experience in Colorado (for instance) shows that they have a lower loss ratio in that state, than they have in Kansas (for instance), the Colorado Insurance Department would probably accept their statistics and allow them to offer their policy at a lower premium there. Conversely, in Kansas, the Insurance Department would probably allow them to offer their policy at a higher premium – but would review their statistics very closely.
Another company could be in a particular market that by its nature, allows for a lower loss ratio. For instance, a company that accepts only non-drinkers would have a better experience than other companies.
Conversely, a company that accepts “sub-standard” risks would have a higher loss ratio, and would deviate upwards, i.e. would charge more premiums. Companies whose policyholders mostly reside in heavily populated cities would have a higher loss ratio than those companies who write in rural areas, if all things are equal and the premiums are the same.
Many companies have made a practice of “red-lining” certain areas where they will not accept new applicants, such as areas considered by many as “ghettos.” This has been found to be discriminatory as most of these urban areas consist of minorities, and the Insurance Departments have taken action against such underwriting tactics.
Underwriting contributes to added premium – and on occasion, a reduction in anticipated premium by an applicant – because of the information, data and statistics available to the underwriters. Inspection reports are a valuable underwriting tool (see discussion on Moral and Morale Risks) as they can uncover many factors not reported on an application. Motor Vehicle Records (MVRs) are available in most states to insurance companies and are heavily used to determine the driving record of insurance applicants and policyholders.
All of these factors go into the determining of the proper premium for the particular risk.
STUDY QUESTIONS
1. In auto insurance, the cost of a unit of insurance determines the
A. policy terminology.
B. published rates.
C. insurability of the applicant.
D. commission.
2. If an individual’s premiums are increased by 50% over the published rates, this is probably because of
A. the applicant’s health.
B. the applicant’s driving record.
C. the agent’s commission.
D. the required profit margin of the insurer.
3. From the viewpoint of regulation, any rates must be
A. reasonable, adequate and not unfairly discriminatory.
B. lower than those offered by any other insurance company.
C. based upon the earnings of the industry as a whole.
D. approved by the Secretary of State of each state.
4. Discrimination in rate making refers to
A. race discrimination only.
B. race. age, sex and marital status.
C. competition among insurance companies.
D. charging more in one geographical area, then in another.
5. Auto insurance rates are based upon similar exposures being grouped together. These groups are called
A. classes.
B. Basic Factors.
C. rates.
D. exposure ratings.
6. The rating classes do not include ________ of the principal operator.
A. age
B. sex
C. nationality
D. marital status.
7. In some states, PAP premiums may be paid
A. whenever the insured wants to pay them.
B. by exchange of like services.
C. on a monthly “installment” plan.
D. partially by an agent.
8. “Deviating” in premiums means
A. increasing premiums in all categories.
B. decreasing premiums in all categories.
C. using the premiums established by the ISO or other statistics and filed with the Ins. Dept.
D. varying from the premiums filed with the Insurance Department.
9. An underwriting practice that has been outlawed in most, if not all, states, is “redlining.”
This is
A. refusing to insure certain vehicles, such as sports cars.
B. specifying certain low-risk areas as “preferred” areas and paying higher commissions for business from those areas.
C. where an underwriter contacts all drivers of red sports cars, in the hopes that they may be single girls who statistically, drive such cars.
D. designating certain areas, usually lower income areas, where they will not accept new applicants.
10. Automobile insurance underwriters rely upon information obtained from
A. newspapers and trade publications.
B. the local library.
C. the net.
D. inspection companies and Motor Vehicle Bureaus.
ANSWERS TO STUDY QUESTIONS
1B 2B 3A 4B 5A 6C 7C 8D 9D 10D