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Introduction
Americans have always loved their automobile. Whether an individual used the shining mode of transportation as a status symbol to impress neighbors or value its safety and reliability, the auto industry has been one important economic foundation of our society. Throughout this book we will not only focus on the elements of the Personal Auto Policy but also the history, development and impact the automobile had on our society. We will also discuss the legal nature of automobile insurance, along with the rating of automobile drivers. We will conclude our discussion with ways to navigate the car insurance waters and how to be sure such Personal Auto Policies are best for our clients.
When John Frank and Charles Durye produced their gas-powered auto in Springfield, Massachusetts in 1896 they could not have envisioned the industry they gave "birth" to. Before 1886, the horse was the transportation mode of most. Like all good ideas, the newness of the new form of transportation would take awhile for total acceptance. After all, the horse was used for years and had a loyal following.
A Detroit pioneer, Ransom E. Olds, realized that mass production was the key. By 1904, he was mass-producing 4,000 cars a year using hundreds of skilled craftsmen.
Finally, in 1913, Henry Ford adapted the moving assembly line from other industries (basically, the meat packing industry). Mr. Ford insisted that engine blocks and other complex parts be cut to precise dimensions in order that the parts are interchangeable,
thus making it much easier to install such parts. This was a tremendous breakthrough because it eliminated the need for many skilled craftsmen. This was also critically important as Mr. Ford mass-produced 321,000 "tin Lizzies" at his Highland Park, Michigan Plant. He was mass-producing autos at an efficient, affordable price that the masses could afford, $290 per vehicle! Now for the first time, the average individual could afford a Model T.
Before Mr. Ford, the auto was marketed to doctors, farmers, businessmen and the police. This group was more likely to try a new invention that would make life simpler. The initial purchasers of these "horseless carriages" were a purveyor of public transportation. The U.S. Postal Service began using cars in 1899 in large cities to speed up mail delivery and three years later the first bus was introduced, which enlarged travel routes beyond trolley lines and railroads. Of course, the popularity of the railroads and streetcars suffered.
By the "roaring 20's", middle class America was able to purchase an auto. Soon, the auto became a symbol of status, sex appeal, health and wealth. Many people believed the two most important days in a person's life was the wedding day and the day one purchased their first car!
In the 1920's General Motors Corporation, under the leadership of Alfred R. Sloan, further revolutionized the industry by offering choice to the consumers. GM's Car Division assembled a different model in different price ranges. This was truly a "style for every purse and purpose". GM also allowed car buyers to use an easy installment plan called "Drive Now, Pay Later" to make purchasing that much more simple. The result was that GM replaced Ford as the leader in auto sales, a position that it still maintains.
Automakers stopped building cars during the war years (1942-46) but by the 1950's business was again booming in the United States. The 1960's and 70's saw new foreign competition, particularly from the German and the Japanese. These foreign cars were much smaller than the large, lumbering vehicles built by the U.S. automakers. The first shock wave came from West Germany's Volkswagen Beetle, which encouraged the U.S. consumer to think "small". Another big wave arrived from Asia with Toyota Motor Corps, Honda Motor Co. and Nissan Motor Co., all taking market shares from the American big three.
As we move toward the new century, the auto industry is attempting to revamp the car. The weight of the vehicle will become lighter; today's average vehicle weighs 3,200 pounds but the goal is to reduce its weight to 2,000 pounds. Also, the car of the future will employ a form of energy storage to recapture expended energy and recycle it. "The car of the future is not going to have an internal combustion as we know it today”, says Bob Chapman, Chairman of the PNGU Technical Task Force at the U.S. Department of Commerce.
Styling, which has become rounder and sleeker over the last 100 years, continues to evolve. The cars likely will be shorter and more aerodynamic in design. Vehicles will also act differently. The car of the future will have as standard equipment: obstacle detection on the road, collision warning and traffic information devices. Also standard will be sophisticated technology that will allow drivers to summon help in an emergency. Voice-activated instrument panels will replace conventional buttons and knobs. In addition, the "heads-up-display", a technology primarily used in aircraft will expand to autos projecting information such as speed and fuel levels in the driver's line-of-vision.
By 2021, experts predict automated highways will guide cars to their destinations. Some auto designers are abandoning all traditional concepts of the vehicle. Some are looking at developing a basic car body that auto buyers themselves can alter to fit their lifestyles.
Demographics Affected by Auto Industry
The old saying by many economists is "the economy goes according to the construction and auto industries" has serious merit. Just by taking a cursory view of the various industries that have grown because of the auto industry and their effects on the economy, this fact becomes obvious.
Autos virtually restructured the landscape of America. The elimination of front porch sitting could probably be traced to the rise of the automobile. As garages became popular, the back yard became more the focal point for relaxation. Autos gave rise to suburban lifestyle. People could live away from the rush of the city but still enjoy the conveniences of city life. That was a big boost to the construction industry. Autos even affected shopping patterns. Shoppers looking for a change of scenery from the downtown department stores could head out to a mall in 1923, when the first suburban shopping center opened in Kansas City, Missouri.
Autos also gave Americans privacy away from home, thus creating the whole drive-in lifestyle. It started with the first drive-in opening in Camden, NJ in 1933. As the years progressed, consumers could buy and eat a full course meal, get the car washed, pickup dry cleaning and conduct banking transactions without even leaving the car.
Leisure Travel
The fast food industry would not exist, as we know it today, without autos. The carhop was the first to appear in the 1930's. It was 40 years later that the White Castle hamburger chain first tested the drive-thru concept. Soon, you "could take a break" at McDonald's or "have it your way" at Burger King without getting out of the car. Where would the travel industry be without the automobile? Vacation spots such as amusement parks, national parks and tourist attractions sprouted up along the main roads and later along the interstate highways.
Kemmons Wilson was one who seized a big opportunity after enduring a horrible hotel stay while traveling with his family. In 1952, Mr. Wilson decided to open his first Holiday Inn. Until then, road travelers had to lodge in bug-infested shacks along the roads. "I told my wife I would build 40 hotels and she laughed!" said Mr. Wilson.
Other Influences
The impact of the automobile continues. Automatic Teller Machines are replacing drive-thru tellers. As technology continues to evolve, the number of workers needed to assemble autos declines and mechanics fixing cars in their backyards are being replaced with skilled technicians trained to repair today's more sophisticated vehicles. As we enter the 21st century, the best paying jobs are going to the more skilled worker.
In summary, the arrival of the automobile brought more than just mobility; it spawned an entirely new lifestyle and opened new business opportunities. It created an abundance of high wage, low-skilled jobs. Yet as the automobile improved the quality of life, it also added some new headaches such as traffic jams. Nonetheless, hundreds of products and services owe their existence or demise to the automobile.
Driving is Hazardous
In the 1950's, the U.S. was a country driven by its automobiles. To serve this, a vast interstate highway system was put under construction, cities were paved over, fast food restaurants sprouted and suburbs became the new centers of American population. In the 1960's, the auto industry was riding high and each year millions of Americans looked forward to the introduction of the new models. It seemed as if nothing could ever stand in the way of the nation's romance with four wheels, shapely sheet metal and the internal combustion engine. Then came Ralph Nader, a lawyer by training, who had also worked as a freelance journalist and an assistant to Daniel Patrick Moynihan in 1964, Assistant Secretary of Labor as a Staff Consultant on highway safety. The nation needed such a consultant, since its affair with the car was proving to be a fatal attraction. The year 1963 brought traffic death to an all-time high of 40,804. What both shocked and interested Nader is that, while many of these fatalities were due (as expected) to driver error, a very large portion were caused by mechanical defects or, even more significantly, design defects. His experience in Moynihan's office provided the background for his 1965 bombshell book "Unsafe At Any Speed; The Designed Dangers Of The American Automobile". The result of such work diminished the love affair Americans had with the automobile. Now, for the first time, the industry was being questioned as to the safety of the product. In reality, when accidents occurred, it was not always the drivers' fault.
Origins of Personal Auto Insurance
Gilbert Loomis, a Westerfield, Mass-achusetts auto mechanic, sparked the auto insurance industry in 1897 as the first recorded mechanic who had built his own one-cylinder car. The premium was $7.50 for $1,000 worth of Liability Insurance. Accidents involving autos and horses were not uncommon because driving was treacherous, the roads initially were unpaved without street signs and stop lights. Had Mr. Loomis been injured in an accident, no ambulance could have brought medical attention to him, as that service did not come about until three years later. In the beginning, auto policies were not even designated for such purpose but were the liability policies that were used to insure liability arising out of collision with horses.
This beginning was followed by an era of total confusion as the industry saw each company design its own unique policy. Every company has their own policy, rating manual and their own way of providing auto coverage. This created a major problem for those who purchased such coverage. They seldom really knew exactly what coverage they had paid for. The policy was quite difficult to read and, since every company had their own policy specifications, comparing became quite difficult.
The insurance companies also had difficulty with the new coverage. Since these were new policies, the law of large numbers (loss statistics become more predictable as the number of similar exposures to loss increase) was not prevalent. Unless an insurance company can predict losses accurately, it cannot set rates that are both competitive and adequate to make a profit after paying for claims and operating expenses.
In the early years, most companies did not have enough of their own insurers to set accurate rates, so they cooperated with one another and shared their statistics.
Diversity of auto policies created a problem for auto insurers. Each policy was open to a different legal interpretation. An insurance company could not be positive that the courts would interpret its policy in the same way that they had (interpreted another insurance company's policy). Of course, this led to uncertainty in rate making.
By the end of the 1920's, the insurance companies realized that the use of one standard automobile policy, by all those insurers marketing auto insurance, would be in the best interests of both themselves and the consumer. This idea developed into the drafting of the Basic Standard Automobile Policy, completed in 1935. At the same time, a standard Garage Liability Policy was developed and included, under one form, all of the major liability insurance coverage. It included auto, auto repair garages, parking lots, dealerships and service stations. The Standard Auto Policy stood for 20 years. The Garage Policy was used for business only but the Basic Policy was used for individuals and businesses alike.
The following years saw the introduction of two other Standard Auto Policies. The Comprehensive Automobile Policy (1940) and the Family Automobile Policy (1956). The Comprehensive Policy was designed for business entities such as corporations or partnerships, while the family policy was designed strictly for use by individual or families in the personal market.
These developments were important. Both policies expanded coverage initially seen in the Basic Standard Policy. The two new policies emphasized the division of Auto Insurance into a business side and personal side. This division was further enhanced in 1959 when a rating organization introduced the Package Automobile Policy. Another rating organization introduced the identical "Special" Automobile Policy. Like the Family and Personal Policy, these two new standard policies were only for cars owned by individuals or families.
In 1963, the Special and Package Policies were combined into the Special Package Automobile Policy. In the late 1970's, the states began to mandate clearer language in policies and requested insurance companies to become more contemporary. The Personal Auto Policy was introduced, replacing the Family and Special Package Policies. The Business Auto Policy replaced the Basic and Comprehensive Policies which covered auto exposures of corporations, partnerships and other organizations.
The Personal Automobile Policy was developed by Insurance Services Office (ISO), the largest insurance rating and advisory organization in the U.S. If any of the insurance companies choose to deviate from the ISO policy language or rates, it is free to do so. It is quite common for ISO subscribers to deviate from ISO rates but tend to leave the ISO policy wording intact. Many insurance companies not affiliated with ISO (independent filers) use policies similar to the ISO standards.
Nature of Automobile Insurance Problem
With the popularity of the automobile came many problems. First, millions of motorists are injured or disabled each year in automobile accidents and thousands of persons killed. More than 30 million auto accidents a year cause between 40,000-50,000 deaths and five million injuries, as well as, economic losses:
1. $ 10.2 billion in 1960
2. $ 23.5 billion in 1970
3. $ 80 billion in 1986
4. $100 billion in 1990
The high cost of medical expenses, pain and suffering, the unexpected death of a family member and damage to or loss of an automobile has a profound impact on the family.
In addition, society must deal with the problem of compensating innocent automobile accident victims for their bodily injuries or property damage caused by negligent drivers. The various methods for compensating automobile accident victims include the Tort Liability System, Financial Responsibility Laws, Compulsory Insurance Laws, Unsatisfied Judgment Funds, Uninsured Motorists Coverage and Under-Insured Motorists Coverage.
Many people drive automobiles, which creates severe problems for the insurance companies. The biggest problems revolve around four basic areas:
1 - high frequency of automobile accidents
2 - high costs associated with automobile accidents
3 - actions of irresponsible drivers
4 - substantial underwriting losses
No-Fault Automobile Insurance Laws will be examined as an alternative technique for compensating accident victims.
Automobile insurers also have the problem of providing Automobile Insurance to irresponsible drivers, such as, high-risk drivers, drunk drivers and persons who habitually violate traffic laws.
High Frequency of Automobile Accidents - American motorists are smashing into each other at an alarming rate. Example: in 1993 motorists were involved in 36 million motor vehicle accidents. About 7 million injuries resulted from these accidents and about 51,000 were killed. Although the majority of accidents occur in urban locations, drivers in rural areas are more likely to be killed. In 1993, 60% of the fatal accidents occurred in rural areas.
Most fatal accidents are due to two major causes: (1) improper driving, (2) alcohol. One study showed that 62% of the fatal accidents in 1992 involved improper driving, such as, speeding, right-of-way violations, driving to the left of center and other careless acts. In addition, it is estimated that drunk drivers are involved in 50-55% of all fatal accidents.
High Costs of Automobile Accidents - The economic costs of motor vehicle accidents are staggering. In 1992, motor vehicle accidents resulted in an economic loss of an estimated 91 billion, which was nearly 5% higher than the 1988 estimate of 89 billion. The economic loss includes the cost of property damage, medical costs, lost productivity, emergency services, legal and court costs, public assistance programs and insurance administration expenses.
The cost of Automobile Insurance Claim Settlements and court awards has also increased sharply in recent years. From 1979-1992, the average paid bodily injury claim arising from private passenger cars increased from $3,550 to $9,345. During the same period, the average paid Property Damage Liability Claim arising from private passenger cars increased from $715 to $1,725. At the same time, the cost of living increased only 69% which indicates that automobile accident claim costs have increased more rapidly than the rate of inflation. This rapid increase in automobile accident costs has been largely attributed to sharp increases in medical costs, automobile repair costs and legal costs.
Irresponsible Drivers - Irresponsible drivers are another part of the overall automobile insurance problem. Irresponsible drivers can generally be classified into three groups: (1) uninsured drivers, (2) drunk drivers and (3) high-risk drivers. These categories are not mutually exclusive since an individual may be part of all three groups.
Substantial Underwriting Losses - Substantial-underwriting losses experienced by automobile insurers are another part of the overall problem. Many automobile insurers have experienced such losses in many states; business has been marginally profitable in several other states overall. The Automobile Liability Insurance business experienced underwriting losses each year from 1979 through 1991. Due to substantial underwriting losses, most automobile insurers have increased premiums and tightened their underwriting standards. As a result, some motorists have considerable difficulty in obtaining the necessary coverage from insurers in the voluntary standard markets.
Uninsured Drivers - The proportion of uninsured drivers varies by state and up-to-date statistics just aren't available. However, an earlier study by the general accounting office indicated that the proportion of uninsured drivers in 1986 ranged from less than 1% in certain states to as high as 38% in others.
The problem is that some uninsured drivers cause accidents that injure other people and cannot pay for the injuries or property damage they have caused. Society then has the problem of protecting and compensating innocent accident victims who are injured by uninsured drivers.
Drunk Drivers - There is wide spread drug and alcohol abuse in the United States and drunk drivers are estimated to be involved in about half of all fatal automobile accidents. Drunk drivers are also responsible for a disproportionate number of non-fatal automobile accidents. Society is cracking down hard on drunk drivers. One federal proposal requires the states to increase their legal drinking age to 21 or lose federal highway funds. Also the states have tightened their drunk driving laws and have increased the penalties for first- time offenders to mandatory jail time. They also have passed laws holding tavern owners and hosts legally liable for accidents caused by drunken customers and guests. Other groups such as Mothers against Drunk Drivers (MADD) are highly visible and are aggressively pushing for effective measures to remove drunk drivers from the road.
High-Risk Drivers - High-risk drivers are motorists who habitually violate traffic laws, who are involved in a disproportionate number of traffic accidents or who are convicted of certain offenses: reckless driving, driving on a suspended license, or driving under the influence of drugs or alcohol. It is extremely difficult for private insurers to insure these individuals because of the catastrophic potential of a claim if the high-risk driver should kill or seriously injure another person.
Availability and Affordability of Automobile Insurance
A final part of the problem is that some groups are unable to purchase automobile insurance contracts at affordable premiums in the voluntary standard markets. Because of substantial underwriting losses, potential catastrophic liability judgments and adverse selection, automobile insurers restrict the sale of Automobile Insurance to certain groups or they make the coverages available only at substantially higher premiums.
The undesirable groups include the high-risk drivers and drunk drivers discussed earlier. Also younger drivers, especially unmarried male drivers, are generally undesirable as drivers by most companies.
In 1992, drivers under the age of 25 comprised about 19% of all drivers in the United States but accounted for 32% of all accidents and 31% of the fatal accidents. Drivers between 20-24 years old had the highest overall accident rate (37 per 100 drivers) and the highest fatal accident rate (68 per 100,000 drivers).
Both automobile insurers and society have enacted insurance plans that make automobile coverages available to the high-risk groups. These special plans include Automobile Insurance Plans, Joint Underwriting Associations and Reinsurance Facilities. The major features of these plans will be examined later in this book.
Chapter 1 - Review Questions
1. The car replaced what popular form of transportation for most Americans?
A. Bus
B. Railroad
C. Horse
D. None of the above
2. What group first embraced the auto as a way to simplify their lives?
A. Artisans
B. Unskilled workers
C. Factory workers
D. Doctors and businessmen
3. The popularity of the automobile lead to:
A. roadside business
B. suburban development
C. shopping malls
D. all of the above
4. This individual shocked the automobile world with his exposure on car safety?
A. Ralph Nader
B. Edward Bennett
C. Henry Ford
D. All of the above
5. In the early going, accidents involving autos and horses were not uncommon due to:
A. interior service areas
B. poor roads
C. poor signaling devices
D. none of the above
ANSWERS
1. C
2. D
3. D
4. A
5. B