Factors That Affect Auto Insurance: From A Company Standpoint

Underwriting programs used by insurers help determine appropriate premiums based on the level of risk. However, auto insurance premiums are also affected by factors that are not directly controlled by companies. These include frequency and severity of crashes, auto repair costs, medical and hospital costs, lawsuits and court judgments, insurance fraud, vehicle type and deductibles.

The Insurance Information Institute estimates that insurer prohibition in its use of generic parts to repair vehicles could add $4–5 billion annually to the cost of auto insurance. According to Jury Verdict Research, the median award for vehicular accident cases increased 22% between 1997–2000.

Crash frequency and severity

The combination of accident frequency and severity affects the portion of your premium that covers losses. Crash frequency is how many and how often crashes occur. The higher the frequency, the more insurers pay in claims.

Between 1980–1998, there was a 17% drop in crash frequency, as measured by property damage (PD) claims. In 1998, 4.09 auto PD claims were filed per 100 insured vehicles. However, the number of bodily injury (BI) claims during the same period rose 33%, according to the Insurance Research Council, to 1.17 BI claims per 100 insured cars. In 1998, Ohio’s claims per 100 insured cars was 1.12 BI claims and 3.97 PD claims.

Accident severity is reflected in the amount paid per accident claim. PD claim costs under auto liability coverage averaged $1,684 in 1991, rising to $2,388 in 2000. Average BI claim payments under auto liability coverage have stabilized partly due to safer cars. The average BI claim in 1991 was $9,995 and $9,894 in 2000.

Recent claim loss changes

Until recently, vehicle make and model were not considered when determining liability premiums. Advances in computerization allow insurers to analyze claims data by make and model. At least one auto insurer reduced premiums in 2001 for medical payments coverage upon review of data on injury claims by make and model, finding that some newer vehicles reduced injury risk more effectively than others.

In 2000, at least two auto insurers planned to raise liability rates on some large SUVs, pickups and vans, and lower premiums on others, based on vehicle safety and claims experience. The injury and property damage that bigger vehicles can inflict, especially when the weights of colliding vehicles can vary by a ton or more, can be significant.

Insurance scoring

Receiving attention more recently is the use of an “insurance score” as an additional tool in determining risk. An insurance score uses some of the information found in your credit report and helps predict the likelihood of filing a claim or the level of risk. Such factors as income, marital status and address are not used in scoring. The application of an insurance score varies by company as do the models used in determining a score.

There is a proven correlation between the way you handle credit and how responsible you will be as an insurance risk. Research shows that some people with certain patterns of behavior in their credit history are more prone to losses from an insurance standpoint. Those who are responsible with their finances are usually more responsible drivers, and typically take preventative measures instead of risks. Insurance scoring benefits the majority of policyholders by lowering premiums.

At close of publishing, HB 519, that calls for limiting the use of insurance scoring, was in the Ohio House Insurance Committee.

Ohio court rulings

State law requires that auto insurance premiums be adequate to cover antici- pated losses, many of which insurers are able to calculate; some however cannot. The unpredictable nature of Ohio court rulings has affected what we pay for insurance and the terms and conditions of the policy. According to the 2001 auto insurance study of the National Association of Insurance Commissioners, Ohio’s average liability premium rose 4.4% between 1995–99 while the US average liability premium decreased nearly 5.5%.

Ohio Supreme Court rulings have expanded coverage on occasion. One such case in late December 2000, Linko v. Indemnity Insurance Company of North America, adversely affected the cost of uninsured/underinsured motorists coverage. With the passage of SB 97 (effective October 31, 2001), this court action was remedied.

Competition factor

The most important factor affecting rates from a company standpoint is competition. Ohio’s environment facilitates competition among insurers, helping to keep premiums well below the US average (see "1999 US Auto Insurance Premiums by State").