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					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



                                                         1
Forms of Motor Insurance

1. Trucks

2. Commercial Autos

3. Three Wheelers (motor rickshaws)

4. Private Auto

5. Two Wheelers (motor cycles)




                                      Insurance Sector Ref orms 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




                                                    Insurance Sector Ref orms in India
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




                                                                 Insurance Sector Ref orms in India
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 casualty
     actuaries.

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

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.




                                                                Insurance Sector Ref orms in India
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‖




                                                                      Insurance Sector Ref orms 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




                                                                   Insurance Sector Ref orms in India
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




                                                                     Insurance Sector Ref orms in India
US and Canada
have many regulatory regimes



1.       US and Canada have many jurisdictions, different regulatory
         systems 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)




                                                                      Insurance Sector Ref orms in India
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



                                                               Insurance Sector Ref orms in India
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.)




                                                  Insurance Sector Ref orms in India
Two Way Classification
1st: 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



                                                           Insurance Sector Ref orms in India
Two Way Classification
2nd: 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




                                                         Insurance Sector Ref orms in India
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




                                                        Insurance Sector Ref orms in India
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




                                                        Insurance Sector Ref orms in India
Loss Costs Per Car
29.26 = 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



                                                                          Insurance Sector Ref orms in India
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.




                                                   Insurance Sector Ref orms in India
Relativities = rates / 29.26
0.783 = 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


                                                             Insurance Sector Ref orms in India
Smoothed Relativities
add col. total & row averages
1.084 = 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

                                                               Insurance Sector Ref orms in India
Smoothed Loss Costs per Car
Smoothed Rates = Smoothed Relativities * 29.26
22.15 = .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


                                                                 Insurance Sector Ref orms in India
Other Models

1. We can also use a “least squares” approach to smooth the
   data




                                                Insurance Sector Ref orms in India
The variables are binary

1. Binary Variables




                           Insurance Sector Ref orms in India
Bailey Simon discussion and Today’s 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




                                                   Insurance Sector Ref orms in India
Sample Auto Rates - NY
Rates vary by age, sex, marital class and territory


             Manhattan    Queens       Brooklyn       Bronx   Buffalo            Clinton
                                                      Urban   Suburbs
                                                                                 County

F 20         1365         1487         2599           2911    595                489
Unmarried



M 20         1789         1909         3379           3949    713                597
Unmarried



F 69         769          851          1451           1563    313                249


M 35         943          1053         1801           1925    377                303




                                                                    Insurance Sector Ref orms in India
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




                                                   Insurance Sector Ref orms in India
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




                                                               Insurance Sector Ref orms in India
Bronx Urban Rates

       Assigned Risk   Allstate   Allstate    Geico        Geico

                                  indemnity                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




                                                      Insurance Sector Ref orms in India
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.




                                                    Insurance Sector Ref orms in India
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




                                     Insurance Sector Ref orms in India
Typical rules

1. Personal lines are more regulated.

2. More “political” lines are more regulated.
    auto
    health
    medical malpractice

3. Commercial lines often unregulated




                                                Insurance Sector Ref orms in India
Stringency of Regulation

1.       Klein, Phillips, Shiu, Journal of Financial Services, 2002 Capital Structure
         of 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)




                                                                     Insurance Sector Ref orms in India
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.




                                                     Insurance Sector Ref orms in India
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




                                                Insurance Sector Ref orms in India
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




                                                 Insurance Sector Ref orms in India
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.




                                                               Insurance Sector Ref orms in India
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.



                                                    Insurance Sector Ref orms in India
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.       Doesn’t 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.




                                                             Insurance Sector Ref orms in India
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.




                                                   Insurance Sector Ref orms in India
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


                                       Insurance Sector Ref orms in India
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



                                                  Insurance Sector Ref orms in India
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.




                                                  Insurance Sector Ref orms in India
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



                                                                 Insurance Sector Ref orms in India
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.




                                                                Insurance Sector Ref orms in India
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




                                                                Insurance Sector Ref orms in India
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 didn’t 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


                                                                           Insurance Sector Ref orms in India
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)




                                                Insurance Sector Ref orms in 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




                                                                    Insurance Sector Ref orms in India
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 Auto
     Insurance.

6.   Proceedings Casualty Actuarial (1960) Bailey & Simon

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




                                                              Insurance Sector Ref orms in India

				
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