Auto Insurance Fundamentals

8/2/2019 Auto Insurance Fundamentals

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9/9/2005 Fox School, Temple University

Auto Insurance Fundamentals:Coverages and Ratemaking

Michael R. Powers

The Fox School, Temple University


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Auto Insurance

Coverages

Bodily Injury Liability (BI)

Property Damage Liability (PDL) First-Party Benefits (FPB)

Uninsured Motorists (UM)

Underinsured Motorists (UIM) Collision (Coll.)

Comprehensive (Comp.)


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Bodily Injury Liability

(BI)

Compensates for personal injury

Economic damages (medical/income-loss)

Non-economic damages (pain&suffering)

Paid on third-party basis

Required limits in Pennsylvania:

$15,000 per person

$30,000 per accident

Optional higher limits available


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Property Damage Liability

(PDL)

Compensates for physical damage

Auto repairs/replacement Other property repairs/replacement

Paid on third-party basis

Required limit in Pennsylvania: $5,000 per accident

Optional higher limits available


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First-Party Benefits

(FPB)

Compensates for personal injury Economic damages only (medical/income-loss)

Paid on first-party basis Required limit in Pennsylvania:

$5,000 medical per person

Optional coverages available: Higher limits of medical (including EMB)

Income-loss

Accidental death


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Uninsured Motorists

(UM)

Compensates for personal injury Economic damages (medical/income-loss)

Non-economic damages (pain&suffering) Paid on first-party basis

Optional in Pennsylvania -- various

limits available Stacked -- all insureds autos

Unstacked -- one auto at a time


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Underinsured Motorists

(UIM)

Compensates for personal injury Economic damages (medical/income-loss)

Non-economic damages (pain&suffering)

Paid on first-party basis

Optional in Pennsylvania -- various

limits available Stacked -- all insureds autos

Unstacked -- one auto at a time


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Collision

(Coll.)


Auto and other property damaged in acollision


Optional in Pennsylvania -- variousdeductibles available


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Comprehensive

(Comp.)


Auto and other property damaged not ina collision (e.g., from vandalism, theft)


Optional in Pennsylvania -- variousdeductibles available


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Pennsylvania Coverage

Summary

First-Party Third-Party

PersonalInjury

FPB Basic Medical

FPB Med. Higher Limits/EMB

FPB Income-Loss

FPB Accidental Death

Uninsured Motorists*

Underinsured Motorists*

Bodily Injury Liab.

BI Higher Limits

PhysicalDamage

Collision*Comprehensive*

Property Damage Liab.PDL Higher Limits

optional coverages in italics

*subrogation permitted


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Basic Auto Insurance

Ratemaking Concepts

Exposure: One unit of risk (= automobile)

Claim Frequency = (#Claims)/(#Exposures)

Claim Severity = ($ Losses)/(# Claims)

Pure Premium = Frequency x Severity= ($ Losses)/(# Exposures)

Loss Ratio = ($ Losses)/($ Premiums)


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Losses (Often Including

Allocated Loss Adj. Expenses)

Calendar-Year Losses

All paid losses

+ change in total loss reserves

Accident-Year Losses

All paid losses

+ case reserves

+ bulk reserves (IBNR)


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AY Loss

Development

Loss Dev. Triangle (Hypothetical):Report 1 Report 2 Report 3 Report 4 Ultimate

AY 95 21 38 61 76 85

AY 96 20 44 62 80

AY 97 23 43 67

AY 98 22 47

AY 99 24


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Premiums

Written Premiums

All premiums collected from new andrenewal business in a given year

Earned PremiumsAll premiums associated with coverageactually provided in a given year


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Expenses

Written Expenses

All expenses gathered from new andrenewal business in a given year

Earned ExpensesAll expenses associated withcoverage actually provided in a given

year


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Breakdown of Auto Insurance

Revenue Dollar

68%

13%

7%

2%6%

4%

Losses/ALAE General Exp. Comm./Aquis.

Premium Tax Income Tax Profit


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Basic

Ratemaking Formulas

Pure Premium Method:

Dev./Trended AY Losses

New Rate = + Trended Fixed Expenses(1 - v + i) x Earned Exposures

Loss Ratio Method:Dev./Trended AY Losses

Rate Change = + Trended Fixed Expenses

(1 - v + i) x Earned Premiums


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Final

Modifications

Increased limits factors

Deductible factors

Territorial relativities

Driver class relativities

Model-type/Model-year relativities

Auto Insurance Fundamentals

Documents

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