Category Archives: Regulation
CORONAVIRUS WRAP-UP: PROPERTY AND CASUALTY (4/17/2020)
CORONAVIRUS WRAP-UP: PROPERTY AND CASUALTY (4/16/2020)
I.I.I. Weighs in on Two House Bills That Would Affect Auto Insurance
Triple-I recently was asked to comment on two measures now before the House Committee on Financial Services. H.R. 1756, an amendment to the Fair Credit Reporting Act, would prohibit use of credit information in underwriting or pricing auto insurance. H.R. 2684 would require the Treasury Department’s Federal Insurance Office (FIO) to annually study personal private auto insurance.
Our input is summarized below.
The insurance credit score is applied to create a rate appropriate to the customer’s riskiness. These scores help insurers avoid charging high-risk customers too little and low-risk customers too much. Every dollar of discount a person with a low score receives is offset by an extra dollar of surcharge to a person with a high score.
Introduced in the late 1980s, the scores have been studied numerous times and found to be a powerful predictor of the likelihood a consumer will become involved in an accident. Concerns have been raised that the scores act as a proxy for income – a variable insurers are banned from using. Recent research finds that this isn’t the case.
Most recently, in 2019 Triple-I and the Casualty Actuarial Society produced a white paper “Insurance Rating Variables: What They Are And Why They Matter” that explains how actuaries rigorously study variables for their effectiveness and impact on the societal goal of keeping insurance available and affordable.
Under H.R. 2684, it appears FIO would be required to annually gather premiums charged and quoted from insurers that write personal auto coverage, along with rating factors, underwriting guidelines, and any information used to compile them.
This would be an enormous undertaking. There are more than 250 million private vehicles in the United States – 87 percent of them insured. But the dataset would be much larger. The proposal also asks for every quote issued to policyholders and other applicants. Each renewal policy gets at least one quote – the renewal at existing terms. Anyone who shops for insurance receives more.
Once the information is collected, the bill would require the release of each insurer’s data, rating algorithms, and underwriting guidelines to the public – including the insurer’s competitors. This would be like requiring a drug manufacturer to give up all its patents annually. Insurers would have no incentive to innovate to find, for example, variables that do a better job than the current ones because, once discovered, the variables would have to be turned over to competitors.
Insurance Rating Variables: A Closer Look
Figuring out what the cost of an insurance premium should be is quite complicated — so complicated that insurance companies employ entire actuarial departments to do just that. Rating variables are an indispensable tool for setting the cost of insurance.
In a new paper, Insurance Rating Variables: What they are and why they matter, the Insurance Information Institute (I.I.I.) and the Casualty Actuarial Society (CAS) explain why actuaries apply variables when setting rates – for example using a driver’s age and gender, accident history and vehicle model year to calculate the premium on an auto policy.
Rating variables are basically the characteristics of individual policyholders that can help approximate the cost of their risks. Insurance companies have been using rating variables to help set rates (and thereby price their policies) for decades.
However, the use of some rating variables has recently generated discussion within the United States. Some states have even passed legislation controlling the use of certain variables, such as gender. “Variables are designed to make insurance affordable and available to everyone,” said Ken Williams, FCAS, CAS staff actuary. “When a variable is removed from rate setting, the consumer stands to lose the most because lower-risk individuals will end up subsidizing higher-risk individuals; or, insurance companies may choose to accept fewer applications from consumers who might cause them to lose money.”
The paper explains that when regulators restrict the use of a particular variable, actuaries may replace it with another variable as a “proxy,” which might not help them price policies as well.
“Imagine that male drivers have higher accident costs and are more likely to drive pickup trucks,” Williams explained. “If gender is restricted, the proxy for gender could become pickup trucks. In this scenario, rates for pickup trucks may increase while rates for other types of vehicles may decrease.”
It is important to note that all rating variables, including proxies, are regulated in every state. For example, rating variables and proxies cannot directly or indirectly impact groups based on certain characteristics, such as race.
The paper notes that the use of rating variables has resulted in a drastic reduction in the number of consumers seeking coverage in state-supported auto risk pools. Since the increased use of rating variables, the number of consumers in assigned risk pools has decreased almost 90 percent.
James Lynch, FCAS, chief actuary and vice president of research and education at the I.I.I., added, “Rating variables are regulated by state and federal authorities and they meet a variety of important criteria: they are credible, objective, and verifiable. They are an essential tool for setting accurate prices that are lower for low risk customers, higher for high risk customers, yet sufficient to cover an insurer’s costs.”
Here are a few key points from the report:
- Insurance companies use rating variables to develop premiums that better reflect the risks that consumers face.
- Rating variables are characteristics of individual consumers that can help approximate the cost of their risks, like vehicle model year in auto insurance or the age of a building in homeowners insurance.
- Rating variables help ensure that less risky consumers pay lower rates than consumers who are at greater risk.
- Rating variables are studied rigorously by actuaries for their effectiveness and impact on the societal goal of keeping insurance available and affordable. They are also closely regulated.
- Actuaries are very careful to make sure that each variable is effective and is subject to a wide range of criteria, including being credible, objective, verifiable, and inexpensive to administer.
- Actuaries also make sure variables are legal. Variables are subject to regulation, and state and federal laws prohibit using rating variables that either directly or indirectly impact groups based on characteristics such as race, nationality, religion, or income.
- Almost every state in the U.S. has the regulatory authority to reject a rating variable that it feels does not meet state requirements.
- Widespread use of rating variables has given consumers more choice and more fairness in the insurance marketplace.
- The ability to set accurate prices is a cornerstone to setting actuarially sound premiums that are lower for low risk customers, higher for high risk customers, yet overall sufficient to cover all the insurer’s costs.
- Better and more available data for use in rating variables means increased ability to determine a person’s exact risk profile.
- Restriction of rating variables that do their job well can lead to potential unintended consequences for the consumer.
- Restrictions on some variables may result in lower-risk consumers effectively subsidizing higher-risk consumers.
- Restricting rating variables affects consumers much more than it impacts insurance companies.
Click here to read the paper.
Insurance Commissioner challenges Guinness record for tallest politician
On March 27, Guinness World Records named Brooklyn councilman Robert Cornegy as the tallest male politician in the world. But his title was disputed by North Dakota insurance commissioner Jon Godfread who claims that he stands an inch and 3/4 higher than Cornegy’s 6 feet, 10 inches.
Godfread, who played basketball at the University of Iowa, said he didn’t know that “being a tall politician was a thing,” and that he’d probably get in touch with Guinness. A spokeswoman from Guinness said that the organization would be “be happy to receive an application” from Godfread.
Guinness keeps track of a wide range of unusual records. Insurance related records include: The highest ever insurance valuation ($100 million) of a painting for the move of the Mona Lisa from Paris to the U.S. for a special exhibition; Pittsburgh Steelers’ Troy Polamalu highest insured hair ($1 million); and the largest ever life insurance policy ($201 million).