PERSONAL AUTO PROGRAM RATING CONSIDERATIONS

(September 2024)

PRIMARY RATING FACTORS

Note: The following is meant merely as a general discussion of factors that may be used in rating automobile coverage. Some states prohibit the use of certain criteria. Following are several factors that are commonly used in setting private passenger automobile rates:

· Territory

· Age, Gender, and Marital Status

· Vehicle Use

· Discounts

Territory

The vehicle territory is a critical element of rating. Each state is divided into a number of distinct rating territories. Each territory is based upon the similarity of historical experience of the cars that are driven and garaged in that area. Of course, traffic density is a primary determinant of territory since the greater the number of cars, the greater likelihood of a loss occurring. Logically, a state’s territories typically consist of its major cities, minor cities, towns and finally its rural areas. The largest geographical territory for most states tends to be its “Remainder of State” which groups large rural areas with a similar exposure to loss.

One question that an insurer may want to consider, especially in light of competition as well as a concern for accuracy, is "How accurate are the current auto territories?" Even the most refined auto territory may still group large areas (even entire counties) together where the area does not accurately reflect a given risk. Rating territories should be examined regularly enough to be confident that the assigned rating factor fairly reflects the given area's exposure. Insurers constantly consider methods that can introduce greater accuracy.

Related Article: ISO Alternate Auto Rating Plan

Age, Gender, and Marital Status

All three of these characteristics are very important rating factors since they tend to be indicators of operator experience and maturity. Many insurers still classify according to these three distinctions with the highest rates typically charged for single, youthful, male drivers. Gender is often an issue since, statistically, females have better loss experience. Married operators also tend to have better loss experience than unmarried drivers in the same age bracket.

Of course, our notion of marital status may have to be adjusted, depending upon how society ultimately decides on the status of different types of relationships. For instance, should auto rating reflect the status of quasi-marital situations, such as civil unions? While increased age and maturity tend to result in better driving habits, advanced age does eventually result in poorer loss experience because of diminished driving skills.

Vehicle Use

The frequency or manner of use remains a critical factor for determining automobile insurance rates. The more frequently a car is used, the higher the probability that it is going to be involved in a loss.

Though classifications may vary by insurer, the following is a common example of use classes:

· Farm or Ranch Use

· Pleasure Use

· Driven to Work (generally 3 to 15 miles daily)

· Driven to Work (over 15 miles)

· Business Use

The Farm/Ranch category is generally the lowest rated category since, to qualify for this category, such vehicles must be principally garaged and operated on a farm or ranch. The isolation of such vehicles justifies the low rates.

Pleasure Use generally means that there should be no business use of the vehicle. A vehicle that’s driven to work a couple of miles a day (or less) often still qualifies for this rate.

The drive to work classifications should be based upon actual driving distance traveled to and from work.

Example: Jeff Metropolis lives in Peaceful Paddock, a new housing community on the very outskirts of Bigtowne. Jeff just applied for a new PAP and his agent sends in the application and, a week later, gets a policy from Bigtowne General Insurance. A few days later, a Bigtowne underwriting clerk calls Jeff's agent. They notice that Jeff's application said that he only drives four miles to work. The underwriter points out that Peaceful Paddock is more than 20 miles away from Bigtowne. The agent explains to the underwriter that Jeff drives only to Peaceful's Transit station and takes a train into Bigtowne. His policy should be rated on his actual driving distance and that doesn't include how far he travels by public transportation.

The highest rating is assigned to vehicles used for business. Cars, trucks, and vans which are used in business tend to be subject to substantially higher incidents of loss.

Other factors have to be considered, such as annual mileage. A car that is used for frequent recreational travel may be a greater risk than a car driven to work a few miles daily.

Note: Insurers are making strides to refine the rating data collected with regard to vehicle use. Some insurers are actually collecting individual use data (submitted by drivers voluntarily) to improve rating accuracy.

Discounts

Insurers routinely offer discounts, such as reduced premiums for good students, driver education/safety training, defensive driving courses, accident/violation-free performance and for owning multiple vehicles (when vehicles outnumber principal drivers). Other discounts may be available for having certain alarms or anti-theft devices, including subscriber services that monitor vehicles.

Note: Some insurers have also developed discounts for drivers who voluntarily enroll in programs that allow an insurer to track individual vehicle use data. Please see the item on telematics below in the Secondary Rating Factors section.

SECONDARY RATING FACTORS

Vehicle Type

Important elements under this factor are:

1. Age and cost new

2. Susceptibility to damages and ability to repair

3. Performance

1. Age and cost new

The rates for comprehensive (or other than collision) and collision coverage usually decline with the age of the vehicle. However, rate reductions are small since, regardless of the vehicle’s age; any damages are repaired using current labor and parts costs. Conversely, comprehensive and collision rates increase for more expensive cars since the more they cost to make, the more they cost to repair or replace.

2. Susceptibility to damages and ability to repair

Rate consideration is generally made for a vehicle’s propensity for damage. For example, a car and a pickup that both cost $20,000 may have different rates since the truck is likely to suffer less damage than a car. The same would be true if one car had a metal body and another, fiberglass. The ease of repair makes a rating difference too. A car may have a modest cost new, but what if it was constructed with unique parts that are difficult to acquire? This fact would increase the difficulty in making repairs and would justify higher rates.

3. Performance

Generally speaking, high performance, sports and/or luxury cars (particularly imports) are more expensive to repair or replace than standard cars. Insurance rates reflect this economic fact.

Points and Surcharges

Drivers with chargeable accidents and/or tickets in their driving history are often subject to higher base rates (for example if they must be placed in a standard, rather than preferred program) or a rating surcharge. Many companies assign points to various violations and accidents. The “points” become factors that are applied to increase the available base rates. Points are usually reserved for accidents where the driver is at fault and traffic violations that have an impact on vehicle operation. Administrative offenses, such as parking or non-moving violations, aren’t usually assigned points. Finally, these surcharges are valid for incidents that occur within the last three years from the date of application or renewal. However, a longer surcharge period may apply to more serious traffic offenses.

Deductibles

Deductibles reduce rates for Collision and Other Than Collision (Comprehensive) coverage as the amount of the selected deductible increases. As with any line of insurance, larger deductibles reduce the number of smaller claims. Avoiding minor claims improves an insurer’s bottom line by saving the actual loss payment as well as the very high cost of administrating such claims. In fact, the loss adjustment expenses may often be greater than the actual claim payments. As car values continue to rise, expect companies to create greater incentives to use higher deductibles and, perhaps, create larger deductible ranges. This may particularly be the case with SUVs, which are extremely expensive.

Miscellaneous

Besides the rate effect caused by a chosen deductible (for physical damage coverages), automobile rates are also modified by additional factors such as liability limits, other discounts, or credits. Liability rates will increase as higher liability limits are selected. Other discounts/credits may include allowances for the following:

· Special protective equipment

· Vehicle alarms

· Anti-theft devices

· Longevity (retention)

· Multiple lines of business

· Loss free discount

· Driver exclusions (increasingly rare)

· Large participating deductibles, etc.

Expenses and Fees

These are generally unique to an insurer but may include optional coverages or administrative fees. They’re generally added to the rate developed after applying all factors to the company’s base rates.

PERSONAL AUTO PROGRAM RATING METHODOLOGY

Traditional

Again, actual rating can vary tremendously by company, even in light of the conforming factors discussed earlier. Regardless of the method, a company must work from a base rate (consisting of loss costs and expense factors), generally developed on a per coverage basis. The base rate may be developed using a company’s own experience, using base loss information from an independent source, and modifying with company expenses or even (where laws permit) mimicking competition. Here’s an example of a rating method:

Liability

(Bodily Injury, Property Damage, Medical Payments, UM/UIM, etc.)

Coverage Base Rate

x Territorial Factor

x Class Factor (Driver Age/Gender/Marital Status)

x Vehicle Use Factor

x Liability Limit Factor

x Ticket/Accident Surcharge

Apply Discounts (generally factors)

Apply Fees (generally flat amounts)

Physical Damage

(Collision and Other than Collision)

Coverage Base Rate

x Territory Factor

x Model Yr/Symbol Factors

x Deductible Factor

x Ticket/Accident Surcharge

Apply Discounts (generally factors)

Apply Fees (generally flat amounts)

Non-traditional

While the traditional methods are still commonly used, many carriers have long used proprietary formulas that include other considerations or steps to improve their ability to determine premiums. Credit scores are a staple for rate determination, usually in the form of adding another step that modifies the base or final premium.

Another rating methodology that is being used, either to supplement or replace traditional rating, is User Based Insurance (UBI) also known as Pay-As-You-Go. Premiums are based, primarily, upon insurer-selected aspects of actual vehicle use. This form of rating includes use of devices that can monitor actual use and such monitoring is on a voluntary basis.

Some carriers have made use of a different/additional method for charging premiums referred to as Price Optimization. However, this method has met with regulatory issues. Some state regulators have banned its use, based on allegations that it is unfairly discriminatory in its rating results. Essentially the method consists of mining customer data to determine persons who are least likely to shop for new coverage. This group, since it is more loyal, is less affected by higher rates and their premiums are increased. It actually acts as a loyalty surcharge, resulting in charging more to policyholders who have been with the insurer the longest.

Another trend with rating is also due to advancements in technology. More insurers have invested in the use of algorithms, more specifically, artificial intelligence-assisted rating.