How the Growing Use of Non-Driving Factors in
Auto Insurance Pricing Affects Consumers
Consumer Federation of America’s28th annual Financial Services Conference
Washington, DC - December 3, 2015James Lynch, FCAS MAAA, Chief Actuary
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5533 Cell: 917.359.3908 [email protected] www.iii.org
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Three Facts About Non-Driving Factors
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1. Most Factors Are Non-Driving Factors
< 16
16-20
21-24
25-34
35-44
45-54
55-64
65-74
>74 -
5,000
10,000
15,000
20,000
25,000
30,000
Crashes per 100,000 Drivers, By Age
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Male Female -
1,000 2,000 3,000 4,000 5,000 6,000
Crashes per 100,000 Drivers, By Gender
SOURCES: U.S. Department of Transportation, National Highway Traffic Safety Administration, Federal Highway Administration.
Age
Gender
Territory/State
No. 2: Most Drivers Have Clean Driving Records
In Accident5.7%
Ticketed5.3%
Clean Record89.0%
In One Year. . .
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Ticket or Ac-cident or Both
29.5%
Clean Record70.5%
In Three Years. . .
Three-year calculation makes conservative assumption that no ticketed driver in a year is in an accident that year.SOURCES: Insurance Information Institute calculation using data for 2012 from ISO, a Verisk Analytics company, and Langton and Durose, Police Behavior During Traffic and Street Stops, 2011, Department of Justice, p. 7.
No. 3: Insurance Scores Are Effective
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1 2 3 4 5 6 7 8 9 10 -
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00 1.93 1.59
1.48 1.36
1.25 1.25
1.15 1.08
1.12 1.00
Paid Loss by Insurance Score, Collision Cov-
erage
Paid
Los
s Rel
ativ
e to
Hig
hest
Dec
ile
Relativity Controlled for Ethnicity, Neighborhood Income.SOURCE: Federal Trade Commission, Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, July 2007, Table 6.
Confirming Studies IncludeNAIC (1996)Virginia (1999)Michigan (2002)Texas (2003)Texas (2004)FTC (2007)New Jersey (2008)Georgetown U (2015)
No. 4: Insurance Scores Lower Ratesfor Most Drivers
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Excellent Score
Good Score Poor Score $-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$1,409
$1,721
$3,826
Str Avg; $2,319
Wtd Avg; $1,811
Average Quotes: Florida
SOURCE: Insurance Information Institute calculation based on Consumer Reports data.
Drivers Most Likely to Be in Accident Pay
More.
Safer Drivers SaveStraight Average: Two-
thirds Save $754 (33%)Weighted Average: 95%
Save $106 (5%)
Increase14.8%
Decrease39.3%
No Change45.9%
Impact of Credit Scores on Consumers
SOURCE: Arkansas State Insurance Department, Use and Impact of Credit in Personal Lines Insurance Premiums Pursuant to Ark. Code Ann. § 23-67-415, 2015, p. 4.
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Three Facts About Price Optimization
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1. Insurers Have Always ‘Optimized’ – With Regulator Knowledge & Approval
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REDACTED
Other Examples: Rate Capping, Teen Drivers
Companies Temper
Increases Based on ‘Market
Judgment’
Sources: System for Electronic Rate and Form Filing (SERFF) via SNL Financial; Insurance Information Institute.
Regulators Are
Generally OK With
That.
2. Optimization Is Not Price Gouging
Traditional PracticeUsed ‘Seat-of-the-Pants’
Judgment to Discount Off Indication
What’s NewSoftware Informs the
Judgment
Never Exceeds Actuarial Indication Today's Rate
Actuarial Indication
$98 $100$102$104$106
$100
$101
$102
$103
$104
$105
$106
An Example
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Selected: +3%
Indicated: +6%
3. Optimization Doesn’t Raise Rates; It Distributes the Rate Change
As Practiced in U.S.Remains True to Cost-
Based PriceApplied to Classes,
Not Individuals
Innovations Are Usually Encouraged, With Appropriate Restraint
Overall Class 1 Class 2 Class 3 Class 40%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
6%
9%
5%
8%
2%
3%
6%
2%
4%
0%
3%
8%
0%
3%
1%
Indication Judgment Optimized
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Example (cont’d): There Are Many Reasonable Ways to Achieve
Reasonable Rates.
By Class
Indication
Exceed
Doesn’t
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