Motor Insurance Pricing - TGK030106

Pricing of Motor Insurance
Meeting-cum-Seminar on Preparedness towards De-tariffing in Non-life Insurance

Hyderabad, India, March 13 & 14, 2006
Prepared by: Thomas G Kabele, FSA, BearingPoint
Forms of Motor Insurance

1. Trucks 2. Commercial Autos
3. Three Wheelers (motor rickshaws)

4. Private Auto
5. Two Wheelers (motor cycles)
Insurance Sector Reforms in India
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
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
India may be ahead of most countries

1. 2.
Many Eastern European countries still have tariffs. Many western European countries have no way of gathering data. No ISO, No NCCI. No TAC. Most European Countries have no formal training program for casualty actuaries. India has casualty actuarial study program based on UK (1-2 exams on casualty). But UK exam material can be pricy.
3.
4.
5.
Indians can supplement UK, ASI material from US / Can Casualty Actuarial Society study notes and journal articles including Astin Bulletin are available for free.
Eventual Results from Detariff Variations 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
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 variables that 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 lock
brakes
US and Canada
have many regulatory regimes
1.
US and Canada have many jurisdictions, different regulatory systems but a similar product. US
2.
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 Canada good places to study

1. 2.
US and Canada have many regulatory regimes. US and Canada have good data gathering. In US NCCI (National Compensation) and ISO (insurance Services Office) and CLUE gather data. US and Canada have a good actuarial training programs
3.
(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. International actuarial association : actuaries.org
5.
Example of Pricing
Canada Experience, Liability Insurance
1. Based on Bailey & Simon 1960, Casualty Actuarial Society
(casact.org)
2. Casualty Actuarial Society has many papers on automobile
pricing.
3. Other than U.S. and Canada few countries have an agency
to 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 Classification

1st: Driver / Use classification
Class 1 5 3 2 4
Driver / Use class Pleasure, no male operator under 25 Married owner under 25 Business use (commuting) Pleasure, non principal male operator under 25 Unmarried owner under 25
Two Way Classification

2nd: Merit Class
Merit Class
Licensed and accident free last 3 years
Licensed and accident free last 2 years
Licensed and accident free 1 year
All Other
Input: Earned Car Years (number of cars in each class)
A 1 5 3 2 4 Total 2,757,520 64,130 247,424 130,535 156,871 3,356,480
X 130,706 4,039 15,868 7,233 17,707 175,553
Y 163,544 4,869 20,369 9,726 21,089 219,597
B 273,944 8,601 37,333 21,504 56,730 398,445
Total 3,325,714 81,639 321,327 168,998 252,397 4,150,073
Input: Losses Incurred $Can

A 1 5 3 2 4 tot 63,191,000 1,752,000 9,589,000 4,598,000 7,964000 87,094,00 X 4,055,000 114,000 701,000 380,00 983,000 6233,000 Y 5,552,000 178,000 1,011,000 439,000 1,281,000 8,461,000 B 11,809,000 382,000 2,383,000 1,088,000 3,791,000 19,633,000 Total 84,607,000 2,426,000 13,684,000 6,505,000 14,199,000 121,421,000
Loss Costs Per Car

29.26 = 121,421,000 / 4,150,073; 22.92 = 63,191,000 / 2,757,520
A 1 5 3 2 4 tot $22.92 27.32 38.76 35.22 50.77 25.95
X 31.02 28.22 44.18 52.54 55.51 35.50
Y 33.95 36.56 49.63 45l14 60.74 38.53
B 43.11 44.41 63.27 50.60 70.00 49.27
Total 25.44 29.72 42.59 38.49 56.26
29.26
Loss Costs can be used as is

1. We have produced loss cost rates for each of the 20
combinations.
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 / 29.26

0.783 = 22.92 / 29.26; 0.934 = 27.32/29.26
A 1 5 3 2 4 tot 0.783 0.934 1.325 1.204 1.735 0.887
X 1.060 0.965 1.510 1.796 1.897 1.214
Y 1.160 1.250 1.696 1.543 2.076 1.317
B 1.473 1.518 2.162 1.729 2.392 1.684
Total 0.870 1.016 1.456 1.316 1.923 1.000
Smoothed Relativities
add col. total & row averages 1.084 = 0.214 + 0.870; 1.187 = 0.317 + 0.870
A 1 5 3 2 4 0.757 0.903 1.343 1.203 0.887
X 1.084 1.230 1.670 1.530 2.137
Y 1.187 1.333 1.773 1.633 2.240
B 1.554 1.700 2.140 2.000 2.607
ave 0.870 1.016 1.456 1.316 1.923
ave
0.887
-0.113
1.214
0.214
1.317
0.317
1.684
0.684
Smoothed Loss Costs per Car

Smoothed Rates = Smoothed Relativities * 29.26 22.15 = .757 * 29.26; 31.72 = 1.084 * 29.26
A 1 5 22.15 26.42
X 31.72 35.99
Y 34.73 39.00
B 45.47 49.74
Total 25.45 29.73
3
2 4 tot
39.29
35.20 52.96 25.95
48.86
44.76 62.52 35.52
51.87
47.78 65.54 38.53
62.61
58.52 7627 49.27
42.69
38.50 56.26 29.26
Other Models
1. We can also use a least squares approach to smooth the
data
ri , j b1 X1 b5 X 5 b3 X 3 b2 X 2 b4 X 4 c1YA c2YX c3YY c4YB
The variables are binary

1. Binary Variables
X 5 1 for class 5, 0 for other classes YB 1 for merit class B, 0 for other merit classes We have 9 variables to measure the 20 classes.
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 for
lower mileage
Sample Auto Rates - NY

Rates vary by age, sex, marital class and territory
Manhattan
Queens
Brooklyn
Bronx Urban
Buffalo Suburbs
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
Discussion
1. Manhattan has good public transportation. Many people rent
cars 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
More Discussion
1. Allstate and State Farm have separate companies for
substandard 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
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
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 are
few complaints by cos.
Tariffs are one form of regulation Other forms

1. Prior approval 2. Modified prior approval
3. Flex rating
4. File & Use 5. Use & File 6. No File, maintain record
Typical rules
1. Personal lines are more regulated. 2. More political lines are more regulated.
auto
health medical malpractice
3. Commercial lines often unregulated
Stringency of Regulation
1.
Klein, Phillips, Shiu, Journal of Financial Services, 2002 Capital Structure of Firms Subject to Price Regulation, Evidence from Insurance Industry Developed 3 proxy measures for stringency of regulation. 1: Size of residual market 2. Conning External Climate index (1 to 5=most stringent). Uses
2. 3. 4.
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)
Two measures of leverage

1. 1, Ratio of liabilities to surplus the traditional economic
measure
2. 2. ratio of net premium written to surplus a measure often
used in the insurance industry.
Results of Klein, Phillips, Shiu

1. Companies reduce surplus in stringently regulated markets 2. Government intervention in market is desirable only when
severe market failures exist and government can ameliorate the inefficiency caused by failures
3. But U.S. market is competitive
Rate Compression Rate Depression

1. Rate Compression means the regulator will not let insurers
give full weight to experience factors example must charge young males less than experience rating.
2. Rate Depression means overall rates are inadequate. 3. Both lead to greater residual market and company
withdrawal
Stated Reasons for Rate Compression

1. Unfair to penalize high risk drivers (young males) who have
had 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 raise rates even more.
Subsidies
and 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.
Pay at Pump
1. 2. 3. 4.

Encourages conservation. Encourages clean burning hybrid and electric cars Mileage is important in accidents. Problems
driver density is more important rural drivers pay too much.
5.
Doesnt work to base whole premium on pay at pump, but might be used to subsidize (1) those injured by uninsured motorists, (2) high risks drivers (3) bad drivers.
Massachusetts
1. Massachusetts was regulated, then deregulated in 1977, but
rates went up. AEI Brookings Ch 2.

2. Mass. then reimposed regulation 3. Of 169 rating cells, 70% receive a subsidy while 74 paid a
surcharge. largest subsidy was $1951, 58.5% below cost.
Massachusetts
US 1998
Bodily Injury / 100 cars Loss severity / claim Injury Loss Cost / Auto Property Damage/100 cars Loss severity / claim Property Loss Cost / car
MA 1998 2.29 9,016 $206 7.06 $1785 $126
1.17 9,585 $112 4.09 $2,010 $82
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
New Jersey changes

1. Tried to reduce law suits 2. Introduced basic policy with lower limits and no bodily
injury liability.
3. Has a named driver exclusion to reduce the rates of
parents with young males.

4. Has cross subsidies, an insured cannot be charged more
than 2.5 times the territorial rate.
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
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.
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
Findings
1. No findings of traditional adverse consequences of
regulation:

exit of insurance companies

expanding assigned risk pool declining industry profit.
2. Between 1989-98 US auto rates increased 33% while CA
auto 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 of Bodily Injury to Property Damage Claims. Rate decreases began in 1991
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)
Canadian Experience
1. British Columbia has state owned auto insurance. Fraser
alert says
premiums are about 20% higher ($200) accident rates are higher rates are compressed high risk drivers pay less than risk rating
Bibliography
1. 2.
AEI Brookings, Deregulation Property Liability Insurance, Cummins ed. Journal Risk and Insurance (JRI, RMIR) papers on Japanese, Italian, Austrian, Chinese auto markets Fraser Alert 2003 2004 discussion of government owned insurance co. in British Columbia Klein, Philips Shi Journal of Financial Services
3.
4.
5.
NBER 1995 Suponcic and Tennyson, Rate Regulation and Auto Insurance.
Proceedings Casualty Actuarial (1960) Bailey & Simon American Academy of Actuaries (1990 Regulatory Filings for Health Plans
6. 7.

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Pricing of Motor Insurance

Meeting-cum-Seminar on Preparedness towards De-tariffing in Non-life Insurance

Prepared by: Thomas G Kabele, FSA, BearingPoint

Forms of Motor Insurance

3. Three Wheelers (motor rickshaws)

5. Two Wheelers (motor cycles)

Insurance Sector Reforms in India

Motor Rates in India

3. Rates for own damage vary by value of auto

Insurance Sector Reforms in India

What will be Covered in this talk

many jurisdictions, good data gathering, formal actuarial programs

3. Likely effects of risk rating

examples of rate variation from New York

4. Pricing example from Bailey Simon 5. Rate Compression, Rate Depression

Insurance Sector Reforms in India

India may be ahead of most countries

Insurance Sector Reforms in India

Eventual Results from Detariff Variations in liability rates

Driver demographics age, sex, marital status

slightly higher rates for unmarried males (25-29)

rates higher for areas with more lawsuits

Mileage and use of car

Insurance Sector Reforms in India

Rates based on Merit

lower rates if accident and conviction free for 3 years

Insurance Sector Reforms in India

Own Damage Rates, auto variables that affect rates

higher rates for cars that hard to repair

cars are rated by crash worthiness

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

Insurance Sector Reforms in India

Canada has 10 major jurisdictions

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

Insurance Sector Reforms in India

US and Canada good places to study

Insurance Sector Reforms in India

1. Based on Bailey & Simon 1960, Casualty Actuarial Society

Insurance Sector Reforms in India

Two Way Classification

Insurance Sector Reforms in India

Two Way Classification

Licensed and accident free last 3 years

Licensed and accident free last 2 years

Licensed and accident free 1 year

Insurance Sector Reforms in India

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

A 1 5 3 2 4 Total 2,757,520 64,130 247,424 130,535 156,871 3,356,480

X 130,706 4,039 15,868 7,233 17,707 175,553

Y 163,544 4,869 20,369 9,726 21,089 219,597

B 273,944 8,601 37,333 21,504 56,730 398,445

Total 3,325,714 81,639 321,327 168,998 252,397 4,150,073

Insurance Sector Reforms in India

Input: Losses Incurred $Can

Insurance Sector Reforms in India

Loss Costs Per Car

A 1 5 3 2 4 tot $22.92 27.32 38.76 35.22 50.77 25.95

X 31.02 28.22 44.18 52.54 55.51 35.50

Y 33.95 36.56 49.63 45l14 60.74 38.53

B 43.11 44.41 63.27 50.60 70.00 49.27

Total 25.44 29.72 42.59 38.49 56.26

Insurance Sector Reforms in India

Loss Costs can be used as is