1 pricing of motor insurance meeting-cum-seminar on preparedness towards de-tariffing in non-life...

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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

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)


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. 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.


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”


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


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)

US and Canada have 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 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 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 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 / 29.260.783 = 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 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


Smoothed Loss Costs per Car Smoothed 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


Other Models

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

, 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


The variables are binary

1. Binary Variables

5 1 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


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


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

Manhattan Queens Brooklyn Bronx Urban

Buffalo Suburbs

Clinton

County

F 20Unmarried

1365 1487 2599 2911 595 489

M 20Unmarried

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 regulationOther 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

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)


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 CompressionRate 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. 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.


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 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


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 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


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. 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

1 pricing of motor insurance meeting-cum-seminar on preparedness towards de-tariffing in non-life...

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