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 jamesl@iii.org 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

3

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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