Auto Insurance

Our mission at the Insurance Information Institute (I.I.I.) is to help people understand how insurance operates. Sometimes that means understanding how insurers handle new technologies, particularly auto insurance. Chief Actuary James Lynch answers a question we got last week:

Q: I am researching driver assist technology and the advantages and pitfalls that could be associated with it. Do driver assist technologies raise or lower insurance premiums? A few of the technologies I’m looking at are lane-keeping devices, blind spot warning systems and hands-free cruise control.

A: As far as technological innovations go, insurance companies adjust their rates after a technology has proved its worth on the road. Only then do they know that a technology is effective and how much discount is warranted, if any. That means hands-free driving systems, which have only been introduced in the past couple months, are not earning anyone discounts right now.

You mention lane departure warnings. That is a technology that has yet to prove valuable on its own. The feature alerts a driver that is beginning to drift from one lane to another. When the driver drifts, an alarm beeps. One problem, it appears, is that drivers have trouble understanding what the beep means.

In addition, the feature can be turned on and off by the owner, and owners frequently find it so annoying that they turn it off. I happen to have a car with this technology, and I drove with it for about 10 minutes before turning it off. You would be surprised how many times your wheels touch a lane line; I know I was, particularly when the road curved. So insurers probably aren’t giving a lot of credits for the system.

That doesn’t mean that the idea of a lane departure warning is useless. The problem may be that the notification system doesn’t help the driver do a better job. There’s every chance that manufacturers will be able to refine the system so that it does better later. If that happens, rates will eventually adjust.

Another possibility: Sometimes a feature by itself doesn’t work as touted but will become an important part of a larger system. An example here is antilock brakes, which were introduced a couple of decades ago. The brakes had a special feature that was supposed to help a car stop more quickly when its brakes were slammed on. By itself, they weren’t much of a help – which surprised a lot of people – but they have become an important part of electronic stability control, a computerized system that figures out when a car is starting to skid and corrects the situation.

Electronic stability control is perhaps the biggest safety advance of our generation. The feature, standard since 2012 on all new vehicles, has cut the risk of a fatal single-vehicle crash in half. Insurers closely monitor this stuff, particularly the Insurance Institute for Highway Safety and its sister organization, the Highway Loss Data Institute.

Here at I.I.I. we offer more information on auto crashes in our Issues Update on the topic.

As we put the finishing touches to our Halloween costumes we’ve rounded up some of the not-so-spooky posts from around the insurance blogosphere to keep the ghouls and ghosts away.

First up is Erie Insurance with its post 4 Lesser-Known Halloween Safety Tips. Read all the way to the end and you’ll learn of the dangers of glow sticks. As a parent to two young children who gravitate towards anything that glows, I appreciate the tip that glow sticks cause an increase in poisoning on Halloween. Make sure to tell your kids to keep them away from their mouths.

Next up is Zillow and with an excellent post on how Halloween carries potential financial risk for homeowners. Whether it’s Halloween-related fires leading to property damage or liability claims from trick-or-treaters injured on your property, some practical safety steps and a homeowners or renters insurance policy can help protect your most valuable assets.

Do you have a secure place to park your car? In this Insurance Institute for Highway Safety (IIHS) post (from 2013) we learn that vehicle vandalism peaks on Halloween with nearly twice as many insurance claims on October 31 as on an average day. Such claims include things like slashed tires and smashed windows. Hence the importance of comprehensive auto insurance coverage.

And for the insurance fans among you, last but not least is a post on WillisWire, reflecting not on make-believe monsters, but on the scariest real risks faced by their clients during the year. Which one keeps you up at night? Have your say and take their poll.

Wishing all our readers a safe and Happy Halloween!


Insurance Information Institute (I.I.I.) chief actuary James Lynch brings us a cautionary tale from the open road:

It’s a gritty drive from Los Angeles to San Francisco as I learned with my wife and older daughter this summer – a climb through dry mountains, then across the nation’s Salad Bowl, the San Joaquin Valley, passing strings of tractor-trailers headed up the interstate toward Sacramento and cow country.

Like most tourists, we left the trailers behind by turning west on state Route 46. My wife drove. We passed a thicket of oil derricks and, frankly, not much else. The roads were well-designed and well-kept. Everyone drove fast. Far off we saw the hills that would lead us to Highway 101 and north again.

We came upon what, for that desolate place, was a major intersection – a flashing yellow light and a lane that let oncoming traffic turn left in front of us. A line of cars waited to make that left. Daylight was fading, and it was hard to pick out exactly how many wanted to turn or whether any had begun to.

“That looks like a dangerous spot,” I said.

Then we saw the sign: James Dean Memorial Junction.

Yeah. Right there, 60 years ago – September 30, 1955 – actor James Dean was cruising maybe 85 in his Porsche Spyder when Donald Turnupseed turned left. In moments Dean went from an astounding actor (East of Eden, Rebel Without a Cause, Giant) to a roadside tragedy.

He wasn’t a teen-ager, but he was a teen idol squeezed between the Sinatra and Elvis eras, and now his case is one I can’t help but think of as that older daughter baby-steps toward her first license this fall.

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James Dean Memorial Junction still seems dodgy, but overall driving is much safer. The accident rate has fallen on average about 1 percent a year for decades. But long-term trends have statistical blips. We are in one now.

As we at the I.I.I. note in our Facts and Statistics on highway safety, traffic fatalities at mid-year are 14 percent higher than the same period last year, according to National Safety Council estimates. The economy has improved. People are driving more and perhaps less safely – faster, more texting.

The third week in October is National Teen Driver Safety Week, an event my daughter will be made well aware of, but this year we should all heed its message: Be careful behind the wheel.



Insurance Information Institute (I.I.I.) chief actuary James Lynch offers some perspective on underwriting and auto insurance pricing.

The journalist was working a story on how insurers vary rates in some surprising ways. Over the past few days, industry skeptics have questioned how insurers could have the audacity to charge widows more than married couples, and they have questioned whether drivers with poor credit histories should pay a higher surcharge than a driver with a DUI.

“Does that sound fair?” he asked.

I can’t tell you what the journalist thinks is fair, and of course, my reader friend, I can’t tell what is in your mind.

However, state laws tell insurers what the word fair means, and stripped of legalese, they say a fair rate has to follow the risk as much as possible. People who present great risk must pay more than people who present less risk.

Insurers collect tremendous amounts of data to prove just that.

If an insurer can show that married couples present less risk than others, they deserve a discount. That is fair. It is also fair that men pay more than women and the young pay more than the middle-aged, because the driving records prove it.

Most people think this is OK. They have seen married couples cruising safely in their minivans, and they have been cut off by young, male drivers. Rates follow what they have seen.

By the same standard of fairness, people with poor credit records should pay more than people with excellent credit. Here skeptics balk, yet the data is just as strong, perhaps stronger. Credit information is an excellent predictor of future accidents.

This is harder to understand, I think, because we can’t observe it. I can tell a lot about that fellow who just blew past the stop sign – young or old, male or female – but I can’t tell you, just by looking, whether he is late on his mortgage.

I’ve asked actuaries a lot about credit scores and insurance the past few days. They uniformly tell me its predictive power. People with poor credit incur losses at two or three times the rate of people with excellent credit.

What has surprised me is the certainty and reverence of their answers. One told me, in the jargon: “The models have lift; the standard error is low.” (Translation: Driving record deteriorates steadily, predictably, inexorably as credit score does, without a sliver of doubt.)

Like most actuaries, I’ve known these facts for a while. What surprised me was the respect, bordering on awe, with which these actuaries spoke. They seem to feel they were granted a privileged window, observing something few have – something hard to understand without witnessing it, but once witnessed becomes simple and obvious – as Leeuwenhoek may have felt when he found a drop of water teeming with microbial life.

“The math is there,” I was told. “People just can’t believe what they can’t see.”

Most people benefit from credit scoring. Removing it would raise rates for most people and lower it for a few. And those few will cause more than their share of accidents.

Does that sound fair?

June is Pride month and our annual round-up of the latest insurance news around the LGBT (lesbian, gay, bisexual and transgender) community takes on added significance with today’s U.S. Supreme Court decision on same-sex marriage.

The Supreme Court decision in Obergefell v Hodges means that the U.S. Constitution guarantees a right to same-sex marriage in all 50 states. This has a number of implications for health, life, and auto insurance.

For example, health and life benefits that currently exist in states that recognize same-sex marriage will–once the law goes into effect–extend to all states.

Some of these benefits include: coverage of a same-sex spouse and children under health insurance plans; equal tax treatment of health insurance premiums for married gay couples; and recognition of a spouse for survivor benefits, including social security and life insurance.

For auto insurance offerings, too, this means that LGBT customers who are married will be entitled to the married rate, regardless of where they live.

Esurance, one of the first car insurers to extend the married rate to LGBT customers, points to what equality means for auto insurance in a just-issued press release here.

For LGBT couples who are married or are planning to get married, Esurance offers the following advice:

In addition to saving money with the married rate, married couples in states newly recognizing same-sex marriage can be identified as a spouse on their partner’s insurance policy. This will allow them to receive additional benefits on that policy such as coverage while driving a rental or borrowed car.

Until the ruling goes into effect in individual states, Esurance will continue to extend its married rate to either married gay couples, domestic partners or those in civil unions—even in states that have yet to recognize same-sex marriage. Something it has done since 2011.”

Gen Y customers–or Millennials–have expressed a sharp increase in satisfaction with their car insurance compared to other generations, according to the just-released J.D. Power 2015 U.S. Auto Insurance Study.

The study examines customer satisfaction in five factors: interaction; price; policy offerings; billing and payment; and claims.

Overall customer satisfaction with their auto insurer reached an all-time high of 818 on a 1,000-point scale, an improvement of 8 index points from 2014.

Satisfaction among Gen Y customers increased by 21 points—the biggest increase compared with the other generations. Satisfaction among Gen X customers was up 6 points, and among Boomers by 4 points, while Pre-Boomers were less satisfied (-3 points).

Improved interactions had the greatest impact on overall customer satisfaction and were also the largest contributor to the year-over-year improvement, the JD Power survey found.

Interaction satisfaction among Gen Y customers came in at 827, an increase of 20 points from 2014.

Customer interaction preferences are changing. Gen Y’s preference to interact exclusively via digital self-service (Web or mobile) increased to 27 percent in 2015, up from 21 percent in 2011.

A similar preference to interact via Web or mobile is true of other generations: Gen X (23 percent vs. 19 percent in 2011); Boomers (12 percent vs. 10 percent); and Pre-Boomers (6 percent vs. 4 percent).

However, auto insurers need to have their websites ready to resolve customer service issues.

The survey found that among the interaction channels, satisfaction with the website experience receives the lowest average score, most notably among Gen Y customers (816, compared with 826 for Gen X, 841 for Boomers and 861 for Pre-Boomers).

JD Power noted that while customers across all generations are able to use online self-service for basic tasks such as making a payment and gathering information about their account, they also need to be able to resolve more complex issues online.

Still, some activities are better performed through personal interactions, J.D. Power noted.

For example, when it comes to discussing price changes, one-quarter (25 percent) of Gen Y customers would rather talk to someone in person or over the phone, and 23 percent indicate they prefer in person or over the phone rather than the website channel when they have questions about their policy coverage.

The Insurance Information Institute (I.I.I.) has some must-read facts and statistics on auto insurance here.

I.I.I. Florida representative Lynne McChristian sheds light on the topic of price optimization in this post which first appeared @InsuringFLA blog.

Florida regulators issued a memorandum to insurers recently to eliminate the use of something called price optimization. That’s probably an unfamiliar term to most people. It’s interesting that the memo had to define what “price optimization” is in order for insurers to stop doing it. Simply, the memo from the Florida Office of Insurance Regulation was to stop a practice that few insurers are using in the first place and that may actually help lower insurance costs.

Price optimization is a tool that other industries have used for years, specifically the retail and travel industries. It is a new tool for insurers, and it’s one that is designed to add sophisticated computer analysis to the final polishing of insurance prices.

At the very end of setting rates, insurers have always adjusted prices, almost always slightly lower, to reflect the industry’s competitive nature. It used to be a seat-of-the-pants guess by a real, live actuary; now, a computer helps give the final nudge.

That takes human guesswork out of it, yet the computer does the same thing.

Some critics have turned this equation upside down, stating instead that an insurance company is looking only to increase profits. Florida is one of four states that is prohibiting the practice of price optimization before there is a clear understanding of its consumer benefits. Most other states are carefully studying the practice and awaiting a white paper being developed by a special task force established by the National Association of Insurance Commissioners.

Insurers use all types of data to establish individual insurance rates. The concern critics have about price optimization is that it is not based on commonly used risk factors for auto insurance. Price optimization gave insurers one more tool to employ more sophisticated computer algorithms to give better prices to consumers. But that won’t be the case for Floridians.

Everyone cares about what they pay for insurance, and there are lots of choices for those shopping for auto insurance. So, if you think you’re not getting the best price, use these tips to shop around for auto insurance. To learn more, check out this Q&A on price optimization.

Everyone wants to talk about autonomous vehicles, and for proof I.I.I. chief actuary Jim Lynch offers the AIPSO Residual Market Forum, at which he spoke in mid-April.

AIPSO manages most of the automobile residual market, where highest risk drivers get insurance. Each state has a separate plan for handling risky drivers and AIPSO services most of them in one way or another, acting as the linchpin in the $1.4 billion market, about 0.7% of all U.S. auto insurance written in 2013, according to Auto Insurance Report.

Though small, the residual market is important, but it’s not an area that would naturally lend itself to discussing the self-driving car. If cars could drive themselves, of course, there wouldn’t be much of a residual market.

Even so, I was one of three speakers at the forum’s panel exploring industry trends, and at AIPSO’s request, all three of us touched on autonomous cars.

Though he spoke last, Peter Drogan, chief actuary at AMICA Mutual Insurance, probably did the best job of laying out the future technology and some of its challenges. Particularly spooky was a 60 Minutes clip in which a hacker took over a car Lesley Stahl drove over a parking lot test course. She wasn’t driving fast, but she couldn’t stop after the hacker took over the brakes of her car.

Karen Furtado, a partner at Strategy Meets Action, a consultancy that helps insurers plan for the future, laid out the case for disruption. Autonomous vehicles will not only make vehicles safer, they will change driving habits. Fewer cars will be on the road, and more people will share them, summoning self-driving vehicles through ride-sharing apps, all of which could potentially shrink the $180 billion auto insurance market.

I’ve made my thoughts clear before, both in this blog and elsewhere: the technology will change driving forever, but it takes about three decades for auto technology to become common on roadways, giving insurers a lot of time to adjust. And some coverages, like comprehensive, will not be affected, as they protect cars when they aren’t in accidents.

A PowerPoint of my presentation is posted here.

I.I.I. chief actuary Jim Lynch looks into the future of self-driving cars:

I wrote about autonomous vehicles and insurance for the March/April edition of Contingencies magazine.

I argue that while the safety improvements will reduce the number of automobile accidents, any predictions of the end of automobile insurance look overblown today.

The first cars to drive themselves will only do so for a few minutes at a time – far from the curbside-to-curbside Dream Vehicle that gets most of the media attention. Any new auto technology takes two or three decades to cascade from a pricey option on luxury vehicles to standard equipment found on every used Chevy.

The slow rollout means claim frequency – the number of claims per hundred vehicles – is likely to decline over the next few decades at about the same rate as it has over the past five decades, giving insurers plenty of time to adapt, just as they have since the first policy was issued in Dayton, Ohio, in the 1890s.

Here is an excerpt:

The property/casualty industry will react as it has for decades, as regulation and innovation have made auto, products and the workplace safer. The impact will be carefully measured by actuaries, who will adjust rates as the innovations prove out. Insurers will find new coverages that customers will want.

The Dream Vehicle will change auto insurance, sure, but it won’t destroy it.”

The I.I.I. has an Issues Update on Self-Driving Cars and Insurance.

We’re reading that self-driving cars are no longer a thing of the future, but it’s in the subhead of this Time article: how long will it be before your car no longer needs you? where the heart of the story lies.

Jason H. Harper writes of how he earned one of the first new driverless motor licenses – technically known as an “autonomous vehicle testing” permit – from the California DMV.

He then describes his chauffeured ride by a prototype Audi from Silicon Valley to Las Vegas for last week’s Consumer Electronics Show:

The car uses an array of sensors, radars and a front-facing camera to negotiate traffic. At this point, the system works only on the freeway and cannot handle construction zones or areas with poor lane markings. When the car reaches a construction zone or the end of a highway, a voice orders you to take the wheel back.”

Before taking the 550-mile road trip, Harper had to get special instruction on how not to drive, per California regulations:

The training included basics like turning the system on and off and learning the circumstances in which it could be used. The rest was about handling emergencies, such as making lane changes to avoid crashing.”

Harper says the training was far more difficult and involved than a regular driving test. However, average buyers will not need such training.


Because rollout of this technology is gradual. Audi’s program for example would allow the car to self-drive in stop-and-go highway traffic, but when traffic clears the driver takes the wheel again.

It’s at the very end of the article that a voice from academia reminds us that this approach may be no bad thing as both technology and driver acceptance need time to mature.

Dr. Jeffrey Miller, an associate professor at the University of Southern California, tells Time that in his opinion licenses and drivers will never be obsolete because “the driver will always have to take over in case of a failure.”

It’s an interesting point. From the insurance perspective, too, while self-driving cars are definitely on the way, the implications for insurers are evolving. In its issue update Self-Driving Cars and Insurance, the I.I.I. notes:

Except that the number of crashes will be greatly reduced, the insurance aspects of this gradual transformation are at present unclear. However, as crash avoidance technology gradually becomes standard equipment, insurers will be able to better determine the extent to which these various components reduce the frequency and cost of accidents.”


They will also be able to determine whether the accidents that do occur lead to a higher percentage of product liability claims, as claimants blame the manufacturer or suppliers for what went wrong rather than their own behavior.”

More on auto insurance here.

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