Category Archives: Auto Insurance

E-scooter sharing programs: are you covered?

Move over, ridesharing, there’s a new urban mobility player in town: dockless electric scooter (e-scooter) sharing programs are growing in popularity in cities across the U.S. They operate like bike-sharing programs, but they introduce some interesting insurance issues.

scooting into the future
Man riding an electric scooter

The concept is pretty simple: you download an app from companies like Lime and Bird that lets you find and unlock an e-scooter nearby for a small fee, often just $1. You can then, well, scoot off wherever you want to go, paying per mile of riding. These rented devices are “dockless,” so once the trip is completed, you can park your e-scooter anywhere that local ordinances permit – they can’t block public paths, for example.

We’re not talking about mopeds or Vespa-like scooters, which allow drivers to sit, can reach relatively high speeds, and often require a driver’s license. These are battery-powered Razor-like scooters, which require a you to stand, often can’t go faster than 15 or 20 mph, and usually don’t require a driver’s license.

You can cause a lot of damage at 15 mph, though – trust me, I’ve seen a person step in front of a fast-moving road bike. It wasn’t pretty.

So if you cause an accident, are you covered? That’s where things get a bit murky.

First off, in most cities, the company renting you the scooter probably won’t cover your liability – that’s part of the multipage user agreement you endorse by clicking the ‘I Agree’ button. You’re basically riding at your own risk. This may change, though, as scooting sharing spreads. San Francisco’s new permitting process, for example, requires these companies to have “adequate insurance” for each of their users.

As for your own insurance, whether you’re covered depends on the specific terms and conditions of your policies. You should speak to your insurer or agent. When they were created, the typical homeowners and personal auto policies didn’t really consider whether they’d cover a motorized scooter you just picked up off the curb. Expert opinion and wording are critical.

Homeowners: Under a standard homeowners policy (for example, the HO-3), motor vehicles are usually understood to be any self-propelled vehicle and aren’t covered. That is what an auto policy is designed to do. It’s pretty much the same for renters insurance.

Personal Auto: The standard personal auto policy excludes liability coverage for a vehicle with fewer than four wheels. The scooters we’re talking about have two wheels.

Personal Liability Umbrella:  Personal liability umbrella policies (PLUP) offer an extra layer of protection that kicks in when you reach the limit of your underlying homeowners or auto policy. They can also give coverage for things that are excluded from your other insurance policies. For example, unlike an auto policy, a standard PLUP does not usually exclude vehicles with fewer than four wheels.

The bottom line is: check with your insurer or agent about your coverages.

Missouri auto study rebuts 2017 ProPublica story

By Michael Barry, Senior Vice President Media Relations and Public Affairs, Insurance Information Institute

 

ProPublica’s investigative story last year on auto insurer pricing in four states—California, Illinois, Missouri, and Texas—will be seen in a different light, at least when it comes to Missouri, following this month’s meeting of the National Association of Insurance Commissioners’ (NAIC) Auto Insurance Working Group in Boston, MA.

To refresh everyone’s memory, ProPublica’s April 2017 report alleged “some major insurers charge minority neighborhoods as much as 30 percent more than other areas with similar accident costs.” The I.I.I. pushed back immediately, calling ProPublica’s assertions “inaccurate, unfair and irresponsible.” Moreover, the I.I.I. sponsored research by a leading actuarial firm, Pinnacle Actuarial Resources, which found “multiple concerns” with the methodology ProPublica employed when arriving at its findings.

The NAIC heard from Missouri’s Angela Nelson on Saturday, Aug. 4.  Ms. Nelson said her state’s Department of Insurance, Financial Institutions, and Professional Registration (DIFP) found “no evidence” Missouri’s private-passenger auto insurers were employing discriminatory pricing practices while also determining in a comprehensive July 2018 assessment of Missouri’s auto insurance market the following trends:

  • When adjusted for inflation, the typical Missouri driver has seen a 17 percent decrease in their auto insurance premiums since 1998.
  • Premium levels for liability coverage are two-times higher in Kansas City and St. Louis than they are in the rest of the state.
  • About 13.7 percent of Missouri’s drivers are operating vehicles while uninsured; this tracks closely to the Insurance Research Council’s estimate of 14 percent.

 

Is relief in sight for personal and commercial auto claims?

By Steven Weisbart, Chief Economist, Insurance Information Institute

 

 

About three years ago the Insurance Information Institute noticed a strong correlation between the number of people employed and the amount of driving done, as measured by the U.S. Department of Transportation’s monthly survey of vehicle-miles traveled. Of course, it is reasonable to expect that as more people hold jobs, most would drive to work. And as those who had been unemployed gained incomes, they would also logically be likely to drive more for leisure.

Further, we noticed another strong correlation between vehicle-miles traveled, on the one hand, and the collision paid claim frequency rate (as captured by Fast Track Monitoring Service), on the other—which is also a logical relationship. This, in addition to other factors, such as an increase in distracted driving, higher speed limits on some roads and other causes, helped explain the unusual spike in the frequency of auto insurance claims in 2015 and again in 2016.

However, lately these relationships appear to be weakening. For example, the year-over-year increase in vehicle-miles traveled was more than 2 percent in 2015 and 2016, and despite continued steady growth in the number of people employed, was 1.5 percent in the first half of 2017, just under 1 percent in the second half of 2017, and under 0.5 percent in the first five months of 2018 (the latest data available).

It’s possible that the rise in the price of gasoline is affecting vehicle-miles traveled. For most of 2016 the retail price of a gallon of gas (all grades) was less than $2.40, but for the first half of 2017 it averaged $2.50 and for the second half of 2017 averaged $2.65. For the first half of 2018 the average was roughly $2.85.

The collision paid claim frequency rate has also flattened, echoing the pattern of vehicle miles traveled. These new patterns suggest that the beleaguered private passenger and commercial auto claims might finally see some relief following a few years of combined ratios well north of 100.

What a driverless future means for auto insurance

The American public is skeptical about giving up control of their cars’ steering wheels. Despite the enthusiasm with which autonomous vehicles (AV) are being developed by auto manufacturers and technology companies, recent polls, including this one, showed that few drivers are interested in giving up control of their cars despite the potential safety and time-saving benefits.

And although there’s a long way to go (about 25 to 30 years) before the AV future takes hold, it’s not too early for auto insurers to think about how self-driving cars will affect them.

Haden Kirkpatrick, Head of Innovation & Strategy at Esurance, likens the advent of driverless cars to the beginning of the era of the horseless carriage in the 1890s. Since the first auto policy was sold in 1898, car insurance has evolved from simple handwritten contracts to the high-tech global industry that it is today.

And just as the transition to “horseless” spurred great changes in the early 20th century, the transition to “driverless” will likely mean big changes once again. This time, instead of creating the need for more personal coverage, the move to AV is set to drive the need for more commercial insurance as car manufacturers will assume much of the risk for this new tech.

Kirkpatrick says that it’s too soon to determine where exactly insurers strategy should go. “Where is the vehicle category going to end up? We don’t know yet, 10 to 25 years is a long way down the road.”

What we do know is that technology companies and auto manufacturers (OEMs) are capturing reams of data all the time, and that data can be used for actuarial models. Insurers also will need to form partnerships with the winners in the AV space.

“Insurers are having conversations (with OEMs) to solve problems and pain points. Data is central – a lot of benefits are to be gained with partnerships.”

Where does AV commercial liability responsibility lie?

The terms liability and responsibility begin to break down when there are multiple parties involved, said Kirkpatrick. “When fault is divided between consumer, manufacturer, [and the] software maker, – in the short term there is a mixed environment.” Managing the “ratio of responsibility” will be one of insurers’ biggest tasks.

So, when does the consumer exit the ratio of responsibility?  “One scenario is when the steering wheel is gone, the consumer’s responsibility could be gone,” said Kirkpatrick.

What about the semi-autonomous cars that are on the road now?

The cost benefit of driver-assist features such as adaptive cruise control is not translating into lower insurance costs. “As frequency declines, severity increases, [because of] higher parts and labor costs.” However, preventing the average fender bender involving adaptive cruise control will provide a good baseline to understand the bigger challenges and will help bridge gap in 10 to 15 years.

 

Auto insurance and inflation

Dean Baker and Matt Harmon, writing for the Center for Economic and Policy Research blog, analyzed various methodologies of measuring price changes in auto insurance: the Consumer Price Index (CPI), the Personal Consumption Expenditure deflator and what they refer to as I.I.I. data (average expenditures published by the NAIC). Their comments appear to be driven by the April 2018 report of the Bureau of Labor Statistics that the price of auto insurance in the CPI rose by 9.0 percent over the price in April 2017.  This observation leads to the claim that auto insurance “has passed medical care as a driver of inflation.”

The blog post takes a number of tangents—on health insurance, on the different methodologies used by the CPI and the PCE deflator—and then turn to the observation that what people actually pay for auto insurance isn’t increasing very much at all. They infer that because the cost of auto insurance is rising in the CPI, and at the same time the Bureau of Labor Statistics consumer expenditures survey shows that auto insurance spending remains constant, consumers must be offsetting higher prices by buying less insurance.

In the comments section of the post, I.I.I.’s chief economist, Dr. Steven Weisbart addresses Baker and Harmon’s analyses of the various measurements of auto insurance costs and refutes the assumption that policyholders are assuming more risk as opposed to comparison shopping for cheaper polices, for example.

His full response appears below.

Dean Baker and Matt Harmon are correct that “there are aspects to the issue [of measuring inflation in insurance] that are informative about how we measure and think about inflation,” but their analysis is mistaken.

The CPI does, in general, aim to measure price changes in “quality-adjusted” goods and services. Its method for doing this for auto insurance is, unfortunately, seriously deficient. This is because auto insurance premiums are expected-cost driven. (By law, insurers cannot charge to make up for losses in prior years or charge in one state to make up for losses in another state.) Further, premiums are set based not only on expected claims (and claims adjustment expenses, including litigation defense for some third-party collisions), but also on expected investment income from the period between collection of the premium and the payment of a claim. The BLS methodology for determining current prices for auto insurance does not—indeed, cannot—capture these forces. Without recognizing them, premium increases in the current year over the prior year is mistakenly perceived as inflation.

In the last few years, there has been a dramatic upsurge in both the frequency and severity of auto insurance claims, both private passenger auto and commercial auto. Although severity (the average dollar cost of claims, unadjusted for quality improvements in recent years) has been increasing for a long time, increases in frequency (the number of claims per exposure unit) have been unusual and have been rising sharply. The Insurance Information Institute has discussed this in a white paper, identifying some of the major causes of these increases as increased congestion from the continued growth in the number employed, increased distracted driving, and higher speed limits in some cases. Auto insurers did not foresee these changes. They also (with many others) did not foresee the continued low interest rates that delivered lower investment income than they would have earned (and which they would have used to keep premium increases down) and in recent years increased premiums to try to get “ahead of the curve.” These are not inflationary increases in a quality-adjusted financial service.

Moreover, the BLS measure doesn’t try to capture what people pay. It created a hypothetical buyer and asks a panel of insurance companies what they would charge that buyer. The response doesn’t capture discounts that many insurers offer, such as for insuring both auto and home and other coverages with the same company, or for being a long-term policyholder, or being accident-free. As Baker/Harmon recognize, increases in what people pay for auto insurance have been much smaller than the BLS inflation measure. They infer that this means policyholders are assuming more risk. That’s possible, but other inferences are equally possible—such as that comparison shopping has led them to find the same coverage for a lower premium, or that some coverages are no longer cost-effective as their cars age.

Finally, the 9.0 percent year-over-year increase cited by Baker/Harmon is a bit of a cherry-picked datum. On the day the blog post was published, BLS released its CPI report for June 2018. It shows the CPI for auto insurance at 7.6 percent. Further, in two months the auto insurance component of the CPI will likely drop further, since the 12-month figure includes an unusual 0.9 percent increase in August 2017 that is unlikely to be matched in July or August 2018. Note that in the four most recent months of 2018 increases in the auto insurance component of the CPI were 0.3 percent in March, -0.2 percent in April, 0.4 percent in May, and 0.3 percent in June.

 

 

Animal-related insurance losses up by 6 percent from 2014-2017

Source: NICB

 

The National Insurance Crime Bureau (NICB) released a study today on the number of animal-related insurance losses for the years 2014-2017. A total of 1,740,425 animal-related insurance claims were processed with 1,739,687 of them (99.9 percent) involving vehicles. Since many drivers do not carry insurance for this type of event, the real number of incidents is likely much higher.

Claims are most likely to occur in Pennsylvania, New York and Wisconsin.

The average animal crash claim amounted to about $4,000 in 2016 according to one major insurer. That would have amounted to nearly $1.8 billion in claims in 2016.

 

Auto Insurers engage in aggressive customer courtship as shopping stagnates

Auto insurers are contending with record-low numbers of new shoppers, price competition and the ever looming Insurtech disruptors. These conditions have forced auto insurers into “aggressive customer courtship mode”, according to the J.D. Power 2018 U.S. Insurance Shopping Study.

To court customers insurers are investing forcefully in improving the shopping process and in national advertising to build their brands.

“We’re entering an era of consumer-centric insurance that will likely be marked by a surge in new digital offerings and serious efforts by insurers to improve the auto insurance shopping experience,” said Tom Super, Director of the Property and Casualty Insurance Practice at J.D. Power. “Auto insurers looking to differentiate and win new customers are making big bets with digital—such as in personalization—that meet customers’ growing expectations for improved interactions.”

Highlights from the study include:

  • Delivering an omnichannel experience is critical as 45 percent of auto insurance shoppers use multiple channels when purchasing a policy.
  • Brand reputation is the top driver of consideration, but a strong value proposition remains essential in driving quote and close rates.
  • Insurtech customer awareness still low: Just 6 percent of prospective customers indicate being aware of at least one of the following companies: Lemonade, Metromile, Trov and Sure. Less than half of shoppers who are aware of a given provider would consider doing business with them in the future.
  • Directs are winning purchase experience battle:Overall satisfaction among shoppers who purchased insurance from companies that primarily sell directly to the customer is 846 (on a 1,000-point scale). This compares with a score of 842 among shoppers who purchased insurance from companies that primarily sell through independent agents and 834 among those who bought from insurers who primarily sell through exclusive agents.

 

Opioid abuse by auto insurance claimants — a serious problem

 

Auto insurance may become an inviting target for people seeking opioids, as Medicare is implementing  controversial restrictions on painkillers’ prescriptions.

Opioids were already the largest category of drugs paid for by auto insurers in 2017, according to a recent Auto Insurance Report article citing data from Optum, a pharmacy benefit management firm.  The narcotic represented 19 percent of medications paid for by auto insurance, down from nearly 24 percent in 2016. There were 7.5 opioid prescriptions per claim in 2017 up from 6.7 in 2016.

Tron Emptage, Optum’s chief clinical officer for the Workers Comp and Auto No-Fault division, notes that auto related prescriptions have been rising where workers comp related prescriptions have been falling. The auto related prescriptions also tend to be of a higher dosage than workers compensation.

It’s useful to compare the two types of claims, says Emptage, because injury types tend to be similar. But unlike workers compensation, which has many rules and fee schedules regulating prescription drug use, auto insurers have been on the receiving end of medical cost shifting as well as the abuse of the medical system to support lawsuits and general fraud, says the article. Challenging medical bills can be problematic when first-party claimants are involved, not to mention third-party claimants.

The article concludes that auto insurers in PIP states can establish pharmacy management programs to gain at least a small degree of control over what they pay for.

 

Hail Spring

Source: Farmers Insurance

As those us who are shoveling out from Winter Storm Toby can confirm, the first days of spring don’t always mean warm weather and budding flowers. Instead, the arrival of spring can be accompanied by blizzards, flooding and hail storms.

Farmers Insurance has recently analyzed five years’ worth of auto insurance claims data to come up the top 10 states for hail damage to cars – Montana, Colorado and Kansas are at the top of the list.

Farmers’ data also shows that in the spring season hail accounts for 58 percent of all comprehensive auto claims and water and flooding accounts for 38 percent of comprehensive claims. An interesting fact –  32 percent of collision claims due to a car door opening into traffic occur in spring!

For more on property losses due to hail damage see the I.I.I.’s Facts + Statistics: Hail

Actuarial science vs. Neuroscience

I get interviewed by a lot of newspapers, magazines and TV stations, but maybe the most interesting one came last year when I spoke to David Scharfenberg of the Boston Globe about neuroscience and actuarial science.

David’s article looks at the criminal justice system and suggests that people under the age of 25 should be classified and punished differently from people older than that. Their young-ish minds aren’t fully developed.

He points to scientific studies and programs, but he wanted to talk to me about insurance. The I.I.I., of course, has no opinion on criminal justice, but famously, auto insurers charge younger drivers more than older drivers, and the rates generally change about age 25.

From the article, here is what I said:

The insurance industry’s decades-old imposition of higher rates on young adult drivers is . . . rooted in hard numbers.

The data show a significant decline in the number of accidents for drivers over the age of 25, because they’re more experienced and more mature. And property casualty insurers — more than 2,000 in all — have to retest that proposition year after year, in order to justify the elevated rates to state regulators.

“It’s like, ‘OK, here we are in Arkansas — well, looks like we’re going to be drawing the line at 25, 26 again,’ ” Lynch says. “Now, we’re looking at Massachusetts — oh, there we are again.” The industry, he says, has known for decades what the white coats in the lab are now confirming.

“We were there,” he says, “long before the neuroscientists.”

Postscript: This article was actually published in November, but I only heard about it in mid-January when a prisoner at a correctional center in Massachusetts asked for more information. I sent him this link from our Facts and Statistics page.