Motor Insurance Pricing_TGK030106

8/22/2019 Motor Insurance Pricing_TGK030106

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Pricing of Motor Insurance

Meeting-cum-Seminar on Preparedness towardsDe-tariffing in Non-life InsuranceHyd erabad, India, March 13 & 14, 2006

Prepared by: Thom as G Kabele, FSA, BearingPoint


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Insurance Sector Reforms in India

Forms of Motor Insurance

1. Trucks

2. Commercial Autos

3. Three Wheelers (motor rickshaws)

4. Private Auto

5. Two Wheelers (motor cycles)


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Motor Rates in India

1. Now the rates are Subject to Tariffs

2. We will focus on Private Auto

3. Rates for own damage vary by value of auto

4. Rates of liability have bonus malus

Malus higher rates for bad experience

Bonus discounted rates for good experience


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What will be Covered in this talk

1. India may be ahead of most places

2. U.S. Canada are good places to study

many jurisdictions, good data gathering, formal actuarial programs

case studies from NJ, MA, CA, BC

3. Likely effects of risk rating

examples of rate variation from New York

4. Pricing example from Bailey Simon

5. Rate Compression, Rate Depression


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India may be ahead of most countries

1. Many Eastern European countries still have tariffs.

2. Many western European countries have no way of gathering data. No ISO,No NCCI. No TAC.

3. Most European Countries have no formal training program for casualtyactuaries.

4. India has casualty actuarial study program based on UK (1-2 exams oncasualty). But UK exam material can be pricy.

5. Indians can supplement UK, ASI material from US / Can CasualtyActuarial Society study notes and journal articles including Astin Bulletin

are available for free.


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Eventual Results from DetariffVariations in liability rates

1. Driver demographics age, sex, marital status very high rates for unmarried young males (18-24)

slightly higher rates for unmarried young females (18-24)

slightly higher rates for unmarried males (25-29)

2. Area

higher rates for crowed cities versus rural areas

rates vary by area. (New York State has about 100 areas)

rates higher for areas with more lawsuits

3. Mileage and use of car

higher for commuters

lower for pleasure use


7/48Insurance Sector Reforms in India

Rates based on Merit

Merit Rating

lower rates if accident and conviction free for 3 years

convictions include accidents that are chargeable and result in injury and

damage > certain amount

non chargeable accidents: damage to legally parked cars, or if hit in rear



Own Damage Rates, auto variablesthat affect rates

1. Make, model of car

higher rates for cars that hard to repair

cars are rated by crash worthiness

higher rates to muscle cars

very high rates for very expensive cars: Astin Martin, Bentley, Ferrari,Lamborghini, Masserati, Porsche, Rolls Royce.

2. Discounts for safety equipment, anti theft devices, anti lockbrakes



1. US and Canada have many jurisdictions, different regulatorysystems but a similar product.

2. US

Have 52 major jurisdictions (50 states, Puerto Rico, District of Columbia)

Policies are same or similar

3. Canada has 10 major jurisdictions

Has 4 Atlantic provinces, Quebec, Ontario, Manitoba, Sask. Alberta, BC,

3 northern territories. 3 provinces have state owned auto cos. (BC, Sask. Manitoba)

US and Canadahave many regulatory regimes



US and Canada good places to study

1. US and Canada have many regulatory regimes.

2. US and Canada have good data gathering. In US NCCI(National Compensation) and ISO (insurance Services Office)and CLUE gather data.

3. US and Canada have a good actuarial training programs

(Life Health Society of Actuaries)

(Property Casualty)

www.actuary.org (American Academy)

www.actuaries.ca (Canadian Institute)

4. UK, Australia, India also have training programs:actuaries.org.uk; actuaries.asn.au, actuariesIndia.org.

5. International actuarial association : actuaries.org



Example of PricingCanada Experience, Liability Insurance

1. Based on Bailey & Simon 1960, Casualty Actuarial Society(casact.org)

2. Casualty Actuarial Society has many papers on automobilepricing.

3. Other than U.S. and Canada few countries have an agencyto collect data.

4. India is advanced of many European countries and other

Asian Countries.

5. TAC may continue to collect data (like ISO, NCCI in U.S.)



Two Way Classification1st: Driver / Use classification

Class Driver / Use class

1 Pleasure, no male operator under 25

5 Married owner under 25

3 Business use (commuting)

2 Pleasure, non principal male operator under 25

4 Unmarried owner under 25



Two Way Classification2nd: Merit Class

Merit Class

A Licensed and accident free last 3 years

X Licensed and accident free last 2 years

T Licensed and accident free 1 year

B All Other



Input: Earned Car Years(number of cars in each class)

A X Y B Total

1 2,757,520 130,706 163,544 273,944 3,325,714

5 64,130 4,039 4,869 8,601 81,639

3 247,424 15,868 20,369 37,333 321,327

2 130,535 7,233 9,726 21,504 168,998

4 156,871 17,707 21,089 56,730 252,397

Total 3,356,480 175,553 219,597 398,445 4,150,073



Input: Losses Incurred $Can

A X Y B Total

1 63,191,000 4,055,000 5,552,000 11,809,000 84,607,000

5 1,752,000 114,000 178,000 382,000 2,426,000

3 9,589,000 701,000 1,011,000 2,383,000 13,684,000

2 4,598,000 380,00 439,000 1,088,000 6,505,000

4 7,964000 983,000 1,281,000 3,791,000 14,199,000

tot 87,094,00 6233,000 8,461,000 19,633,000 121,421,000



Loss Costs Per Car29.26 = 121,421,000 / 4,150,073; 22.92 = 63,191,000 / 2,757,520

A X Y B Total

1 $22.92 31.02 33.95 43.11 25.44

5 27.32 28.22 36.56 44.41 29.72

3 38.76 44.18 49.63 63.27 42.59

2 35.22 52.54 45l14 50.60 38.49

4 50.77 55.51 60.74 70.00 56.26

tot 25.95 35.50 38.53 49.27 29.26



Loss Costs can be used as is

1. We have produced loss cost rates for each of the 20combinations.

2. To compute premium we add expenses.

3. The premiums rates can be applied by the underwriter.

4. It is a good idea, however, to smooth the loss cost rates which is illustrated in the following slides.



Relativities = rates / 29.260.783 = 22.92 / 29.26; 0.934 = 27.32/29.26

A X Y B Total

1 0.783 1.060 1.160 1.473 0.870

5 0.934 0.965 1.250 1.518 1.016

3 1.325 1.510 1.696 2.162 1.456

2 1.204 1.796 1.543 1.729 1.316

4 1.735 1.897 2.076 2.392 1.923

tot 0.887 1.214 1.317 1.684 1.000



Smoothed Relativitiesadd col. total & row averages1.084 = 0.214 + 0.870; 1.187 = 0.317 + 0.870

A X Y B ave

1 0.757 1.084 1.187 1.554 0.870

5 0.903 1.230 1.333 1.700 1.016

3 1.343 1.670 1.773 2.140 1.456

2 1.203 1.530 1.633 2.000 1.316

4 0.887 2.137 2.240 2.607 1.923

ave 0.887 1.214 1.317 1.684 1

-0.113 0.214 0.317 0.684


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Smoothed Loss Costs per CarSmoothed Rates = Smoothed Relativities * 29.2622.15 = .757 * 29.26; 31.72 = 1.084 * 29.26

A X Y B Total

1 22.15 31.72 34.73 45.47 25.45

5 26.42 35.99 39.00 49.74 29.73

3 39.29 48.86 51.87 62.61 42.69

2 35.20 44.76 47.78 58.52 38.50

4 52.96 62.52 65.54 7627 56.26

tot 25.95 35.52 38.53 49.27 29.26


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Other Models

1. We can also use a least squares approach to smooth thedata

, 1 1 5 5 3 3 2 2 4 4

1 2 3 4

i j

A X Y B

r b X b X b X b X b X

c Y c Y c Y c Y


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The variables are binary

1. Binary Variables

51 for class 5, 0 for other classes

1 for merit class B, 0 for other merit classes

We have 9 variables to measure the 20 classes.

B

X

Y


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Bailey Simon discussion and Todays Practices

1. 1960: data should be divided by territory

2. 1960: mileage is important

3. Today: One gets a discount for lower mileage.

4. Today: Sometimes there are Senior Citizen discounts forlower mileage


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Sample Auto Rates - NYRates vary by age, sex, marital class and territory

Manhattan Queens Brooklyn BronxUrban

BuffaloSuburbs

Clinton

County

F 20

Unmarried

1365 1487 2599 2911 595 489

M 20

Unmarried

1789 1909 3379 3949 713 597

F 69 769 851 1451 1563 313 249

M 35 943 1053 1801 1925 377 303


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Discussion

1. Manhattan has good public transportation. Many people rentcars when they drive. (Delhi is building a metro)

2. Bronx Urban is a poorer, crowded urban area

3. Queens Urban -- crowded urban area

4. Brooklyn (Kings Co.) crowed urban area

5. Clinton Co. rural area


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More Discussion

1. Allstate and State Farm have separate companies forsubstandard auto.

2. The assigned risk pool covers drivers at a reasonable rate.

3. The data is available on the New York State Insurance Dept.web site.

www.ins.state.ny.us

click on consumers auto consumers guide to auto insurance

4. IRDA or TAC should consider a similar web site
http://www.ins.state.ny.us/http://www.ins.state.ny.us/


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Bronx Urban Rates

Assigned Risk Allstate Allstate

indemnity

Geico Geico

Indemnity

M 20 3860 3949 4527 2669 3967

F 20 2513 2911 3558 1614 2550

M 35 2576 1926 2637 1205 1717

F 69 2529 1563 2832 1033 1717


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Regulation of Auto Insurance

1. Indian currently has tariffs.

There is some variation by area

There is some surcharge for bad experience

There is a bonus system for good experience

2. Many European systems are similar

3. Some Euro. systems have high minimum rates there arefew complaints by cos.


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Tariffs are one form of regulationOther forms

1. Prior approval

2. Modified prior approval

3. Flex rating

4. File & Use

5. Use & File

6. No File, maintain record


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Typical rules

1. Personal lines are more regulated.

2. More political lines are more regulated.

auto

health

medical malpractice

3. Commercial lines often unregulated


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Stringency of Regulation

1. Klein, Phillips, Shiu, Journal of Financial Services, 2002 Capital Structureof Firms Subject to Price Regulation, Evidence from Insurance Industry

2. Developed 3 proxy measures for stringency of regulation.

3. 1: Size of residual market

4. 2. Conning External Climate index (1 to 5=most stringent). Uses

type of rating law,

insurance department employees to number of firms

elected versus appointed commissioner

5. 3. Regulatory disapprovals of NCCI (workers compensation) and ISO(private auto insurance filing)


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Two measures of leverage

1. 1, Ratio of liabilities to surplus the traditional economicmeasure

2. 2. ratio of net premium written to surplus a measure oftenused in the insurance industry.


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Results of Klein, Phillips, Shiu

1. Companies reduce surplus in stringently regulated markets

2. Government intervention in market is desirable only whensevere market failures exist and government can amelioratethe inefficiency caused by failures

3. But U.S. market is competitive


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Rate CompressionRate Depression

1. Rate Compression means the regulator will not let insurersgive full weight to experience factors example mustcharge young males less than experience rating.

2. Rate Depression means overall rates are inadequate.

3. Both lead to greater residual market and companywithdrawal


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Stated Reasons for Rate Compression

1. Unfair to penalize high risk drivers (young males) who havehad no convictions.

2. Subsidizing bad drivers (those who have many convictions)enhances public good by giving them insurance

Counter: driving insured means they cause even more accidents, and raiserates even more.


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Subsidiesand some possible ways of making them.

1. 1. Injured persons hurt by uninsured motorists buy uninsured motorist protection

state subsidy, pay at pump?

2. 2. High risk drivers with no convictions

rate compression (MA, NJ, BC)

pay at pump some discussion by economists

state owned auto insurer (BC, India)

charge each policy via assigned risk pool

3. 3. Bad drivers

same as (2), but less sympathy.


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Pay at Pump

1. Encourages conservation.

2. Encourages clean burning hybrid and electric cars

3. Mileage is important in accidents.

4. Problems

driver density is more important

rural drivers pay too much.

5. Doesnt work to base whole premium on pay at pump, but mightbe used to subsidize (1) those injured by uninsured motorists, (2)high risks drivers (3) bad drivers.


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Massachusetts

1. Massachusetts was regulated, then deregulated in 1977, butrates went up. AEI Brookings Ch 2.

2. Mass. then reimposed regulation

3. Of 169 rating cells, 70% receive a subsidy while 74 paid asurcharge. largest subsidy was $1951, 58.5% below cost.


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Massachusetts

US 1998 MA 1998

Bodily Injury / 100 cars 1.17 2.29

Loss severity / claim 9,585 9,016

Injury Loss Cost / Auto $112 $206

Property Damage/100 cars 4.09 7.06

Loss severity / claim $2,010 $1785

Property Loss Cost / car $82 $126


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New Jersey

1. Brookings Chapter 3

2. New Jersey has higher or near highest rates in U.S.

1998 $1100 / car versus $400 Iowa

3. State is densely populated, 1134 people per square mile(about 400 / sq km.)

4. Had 695.66 vehicles square mile

5. Residual market ran up $4 billion in losses

6. New Jersey suffered from fraudulent claims


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New Jersey changes

1. Tried to reduce law suits

2. Introduced basic policy with lower limits and no bodilyinjury liability.

3. Has a named driver exclusion to reduce the rates ofparents with young males.

4. Has cross subsidies, an insured cannot be charged morethan 2.5 times the territorial rate.


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California

1. Rates rose about 10% per year from 1978-1988.

2. Most drivers had no accidents

3. Proposition 103 in 1988

required regulated industry

abolished certain actuarial variables

use mile driven, years of experience, drivers record

had elected commission

rolled back existing rates

mandated safe driver discounts


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California

1. AEI Brookings Chapter 5.

2. External factors limited losses after 1988

Circa 1988 Court case limited law suits

Enforced seat belt and Driving Under Influence of alcohol and Drug (DUI) laws Roads improved.


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California, Propositon103 1988

1. Rates based on 3 factors: driving record, miles driven,years of driving experience

Area added later

2. Mandatory safe driver discounts

about 90% of those who meet years of experience requirement qualify.

3. Other changes

brokers could rebate commissions

Ins. Department provides shopping data base


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Findings

1. No findings of traditional adverse consequences ofregulation:

exit of insurance companies

expanding assigned risk pool

declining industry profit.

2. Between 1989-98 US auto rates increased 33% while CAauto rates decreased 10%

3. Counter arguments (Brookings p238, 244, 245)

insurers raised rates right before 1988 or didnt decrease rates.

Residual market declined because rates were raised

Aggressive claim filing decrease after 1991 - measured by decline in ratio ofBodily Injury to Property Damage Claims.

Rate decreases began in 1991


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European Countries

1. AEI Brookings, Chapter 9.

2. UK not regulated auto insurance for many years.

3. European Union since 1994 trying to implement single

insurance market.

4. Belgium, Germany and France have bonus Malus system(like India)


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Canadian Experience

1. British Columbia has state owned auto insurance. Fraseralert says

premiums are about 20% higher ($200)

accident rates are higher

rates are compressed high risk drivers pay less than risk rating


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Bibliography

1. AEI Brookings, Deregulation Property Liability Insurance, Cummins ed.

2. Journal Risk and Insurance (JRI, RMIR) papers on Japanese, Italian,Austrian, Chinese auto markets

3. Fraser Alert 2003 2004 discussion of government owned insurance co. in

British Columbia

4. Klein, Philips Shi Journal of Financial Services

5. NBER 1995 Suponcic and Tennyson, Rate Regulation and AutoInsurance.

6. Proceedings Casualty Actuarial (1960) Bailey & Simon

7. American Academy of Actuaries (1990 Regulatory Filings for Health Plans

Motor Insurance Pricing_TGK030106

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