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actuarially a driver's past accident record is predictive of his probable future accident frequency. Moreover, there is very strong public support for the "safe driver discount" or "merit rating" concept, as indicated by the results of numerous public opinion polls and customer-buying behavior.
However, it is also clear that most policyholders are adamantly opposed to being surcharged because of their involvement in an accident which was not their fault. For this reason, merit-rating plans based on accident involvement per se have been found to be unacceptable to the public. Today most merit-rating plans do not impose surcharges for accidents which were clearly not the fault of the policyholder.
It is difficult to see how a new system based on an explicit rejection of the validity of the fault concept could retain the merit-rating concept on a basis acceptable to the public. If the proponents of no-fault schemes remain true to their convictions and ignore fault entirely, they will, we predict, run into intense protests from people who have to pay higher general rates or surcharged rates because of accidents caused by other people's negligent driving. And if they smuggle the fault concept back into the system to still these protests, they are simply conceding that fault and personal responsibility remain workable concepts after all. That is what the Alliance and most other segments of the insurance industry have been saying all along. B. Underwriting
The effects of the AIA's first-party, no fault compensation plan on underwriting considerations would depend largely on the extent to which the rate classifications were devised to reflect actual differences in loss potential among various groups and individuals. To the extent that classifications failed to reflect significant variations, or the rates charged for certain classes failed to keep pace with the actual loss experience, the underpriced groups and individuals would become “undesirable risks" and would be shunned by underwriters in a competitive market.
As indicated in the discussion of rating, the sophisticated insurance company would be able to price and underwrite its product on the basis of many more fine distinctions under a first-party, no-fault system than under the present liability system, mainly because it can identify the claimants and evaluate their probable loss potential more accurately. The trouble is that many of the risk characteristics which would become pertinent under a first-party, no-fault system are not the sort of yardsticks which the public or its elected representatives would be likely to consider in the public interest. Examples of these socially unacceptable risk variables which would become pertinent under a first-party, no-fault system include physical disabilities, cultural or ethnic differences in "claims consciousness," marginal employability because of age or inadequate education, and the policyholder's occupation.
From an underwriting standpoint, a first-party, no-fault system would produce an even greater inclination to investigate the would-be policyholder's personal habits. We doubt that this would enhance the public acceptability of insurance industry practices, in view of the objections being voiced to some of the underwriting investigations we already conduct.
Regarding categories of persons currently considered "substandard risks," some would become more acceptable under a first-party, no-fault system, particularly if statutory collateral benefit sources were offset from the benefits paid under the auto policy, as is contemplated in the AIA's proposal. Military personnel, for example, would become somewhat more acceptable because their medical and wage losses would be absorbed by the government. However, military men, as a group, have much higher accident frequencies than the general population, in part because most of them are young and in part because of their tendency to make long trips without sleep and to engage in other hazardous driving behavior. Thus military personnel would not likely become "preferred risks" despite the fact that their auto insurance benefits would be drastically slashed under an AIA-type plan.
We believe it is also unlikely that ghetto dwellers would suddenly become "preferred risks" under a first-party, no-fault system. Although the benefits they could collect would be lower than under the present system, they would continue to be subject to high accident frequency. In addition, as a group, they are less likely to have available collateral benefits, and are more likely to lose their jobs or be out of work for prolonged periods if they incur disabling injuries (on the assumption that their jobs, on the average, require more physical exertion than the jobs held by the general population).
Medical costs would be a much more significant insurance cost item under the AIA plan than under the present system, because of the unlimited nature of the medical benefits and the ceiling placed on wage replacement benefits. This means high auto insurance costs in areas with high hospital and medical costs, including the urban areas where low-income groups are concentrated.
A first-party, no-fault plan also would put more emphasis on obtaining reliable information about the policyholder. Here again, the difficulties of obtaining such information would be greater in ghetto areas because of the mobility of the population, the general lack of law enforcement, racial hostility and general suspicion of "outsiders" and the "establishment" which prevails in some of these neighborhoods.
Finally, the much higher incidence of auto theft and damage to parked cars (by vandalism, sideswipes on narrow streets, etc.) also would continue to make the underwriting of automobile insurance unattractive in congested ghetto neighborhoods.
All of these factors are environmental and largely beyond the control of the individual policyholder. By eliminating the fault concept, the AIA plan would deprive ghetto residents and other policyholders as well—of the one significant opportunity they have to influence the price they pay individually for auto insurance, by avoiding negligent driving. C. Marketing
It has been assumed that adoption of a first-party, no-fault system would encourage group marketing of auto insurance, and that this in turn would bring lower prices and other benefits to the motoring population. These assumptions may or may not be valid. The fact is that the auto insurance industry already is experimenting with many different kinds of group-marketing techniques under the present system. It is at least possible that a radical switch to a new type of system would retard this development, since a considerable amount of time would be needed to develop credible classifications and loss experience.
Past experience with group merchandising, both in auto insurance and in such well-developed areas as group life and group health insurance, indicates that the price does not become attractive to the entire gamut of employees until the employer decides to pay a substantial portion of the premium as a fringe benefit. If this should occur in auto insurance, the cost of providing the subsidy would end up in the prices of the goods and services produced by the employees involved. The net result is that people who do not have available such a subsidy (generally, the non-wage-earners, nonunionized workers, the self-employed and those employed by small industries and small retail establishments) will pay for the subsidized worker's auto insurance in the cost of the products and services they buy, in addition to paying for their own auto insurance. The impact would be especially regressive in the case of many groups considered economically deprived. D. Other Price and Availability Considerations.
The present first-party coverage, medical payment, is so closely related to the pricing, underwriting and marketing techniques used for automobile liability that little information is available from that experience to help in solving price and availability problems under a no-fault system. The medical payment rates are related to the bodily injury rate and therefore vary by classification and territory. It has not been found necessary to establish new rating territories or classifications because of the medical payment coverage. Medical pay is not written separately from bodily injury liability coverage and underwriting consideration is entirely dependent upon the underwrting characteristics of the risk from a liability point of view.
1. Alliance Actuarial Committee Report, “Actuarial Report on the Adequacy of the Costing of the American Insurance Association's 'Complete Personal Protection Automobile Insurance Plan."
2. Reprint of Article from the Journal of American Insurance Titled “How Auto Repairs Inflate Your Insurance Bill".
Damage to cars-not people is the biggest contributor to rising auto insurance costs.
On a rain-slick Ilinois highway a few weeks ago, a young engineer returning from work ran onto the shoulder to avoid rear-ending another car. He crumpled the right front fender and bumper of his 1969 station wagon against a guardrail. When he took the car in for repair a few days later, thinking he would pay the cost out of his own pocket, he was shocked to receive a bill for $196 and quickly decided to file a collision insurance claim after all. He paid the first $100- the amount of his deductible--and the insurance company paid the rest.
Motorists and insurance companies throughout the country are having similar experiences. The cost of auto repair has been rising at an astronomical rate, exerting inflationary pressure on the cost of owning and insuring cars. American drivers now spend an estimated $25 billion a year on auto repair and maintenance-an average of $250 a year for each of the 100 million vehicles on the road.
The rise in the cost of collision-type repairs has
been especially sharp. Prices of auto replacement parts have increased about 60 percent in the past nine years, for example. Some parts have gone up as much as 10 percent in the last year alone. Labor charges for body work and other typical collision repairs have escalated sharply in the same period.
This inflationary trend has had a strong impact on the premiums which car owners pay for their auto insurance. In fact, contrary to popular belief, the cost of repairing vehicle damage is a more significant factor in the rising cost of auto insurance than is the cost of personal injuries. As illustrated in the chart on the following pages, the owner of a 1969 model medium-priced car typically spends two-thirds or more of his total auto insurance dollars for coverages that pay for vehicle repair or replacement. And the cost of vehicle coverages has been rising at a faster rate than the bodily injury coverages in recent years.
Since 1961, for example, property damage liability coverage has risen in price 47.7 percent, on a country.
wide basis. During the same period, the cost of bodily injury liability protection, the major component of the personal injury coverages, has increased by an average of only 22.5 percent country-wide.
In a nation where a car has become more a necessity than a luxury, the runaway increase in auto repair costs (whether paid for in the form of insurance premiums or directly out of the motorists' pockets), has become a major source of concern to auto insurers, consumer groups, auto manufacturers and the auto repair industry itself. Both the auto makers and the auto repair industry have been under scrutiny by the Senate Antitrust and Monopoly Subcommittee, chaired by Senator Philip A. Hart (D-Mich.), in a series of hearings which began in December, 1968.
Testimony given at these hearings indicates that vehicle design is a major contributor to the high cost of auto repair. Dr. William Haddon, Jr., former director of the National Highway Safety Bureau and now president of the Insurance Institute for Highway Safety, was particularly critical of ineffective auto bumpers that do very little to protect the car
from damage, even in low-speed collisions. He also pointed out that retractable headlights, fancy chrome grilles and other design features intended primarily for aesthetic appeal have added to the modern auto's vulnerability to damage.
For example, minor impact to the front end of one popular 1969 car requires replacement of the bumper, grille and center nose panel, at a cost of about $250. A comparable impact to the front end of the 1968 model costs about $100 to repair.
Preferences of auto purchasers are at least partly responsible for the design features that make cars more vulnerable to damage. Motorists enthusiastically buy de luxe models and optional equipment, which add substantially to the loss when a car is involved in a collision. It's estimated that 56 percent of all 1969 model cars had factory air conditioning, up from only 38 percent in 1967 and only 11 percent in 1962. On most cars, the condensers, evaporators and hoses for the air-conditioning system are located in the front end, vulnerable to damage in even a relatively minor collision. Replacement of these parts costs about $150. More than 56 percent of new cars sold in 1969 likewise came equipped with power brakes, and automatic transmissions are now the rule rather than the exception. Such extras as highperformance engines, tinted glass, vinyl roofs and fancy wheel covers are also in increasing demand.
The cost of repairing or replacing these expensive extras is directly reflected in the premiums charged for auto collision and fire, theft and comprehensive physical damage coverages. Cars are grouped for rating purposes into seven categories, primarily on the basis of their list prices. Cars costing less than
Two-Thirds of Your Auto Insurance Premium Goes for Vehicle
New York (Queens)
Vehicle Coverages Cost This Per Cent of Total Premium
$1,600 are in category 1, those costing $1,601 to $2,100 are in category 2, and so on. The dividing line between the other categories comes at $2,750, at $3,700, at $5,000, at $6,500 and at $10,000. So-called "high-performance" cars-lightweight and intermediate-weight cars equipped with extra high powered engines-are rated higher than their list price would indicate because they tend to be involved in more severe accidents and therefore produce higher insurance losses, on the average.
One suggestion that came out of Senator Hart's hearings is that insurance companies recognize damageability and repairability of cars to an even greater extent by assigning lower rates to makes and models found to be significantly less vulnerable to damage or cheaper to repair than other cars. Higher rates would be charged for cars found to be more vulnerable to damage or more expensive to repair. An experimental rating system of this kind is now in effect in Sweden, and the U.S. insurance industry is study. ing it and other ideas for encouraging more emphasis on repairability in auto design.
Auto insurers also have shown great interest in experimental shock-absorbing bumpers, which potentially could reduce both vehicle damage and injuries by absorbing much of the impact of auto collisions. (Full details on the most promising design are given in the following article, which begins on page 18.)
In the meantime, motorists themselves can do much to reduce the number of dollars they pay for vehicle damage coverages. The higher the general rate levels in your community, and the higher your risk classification as an individual driver, the more
dollars can be saved by these methods:
1. Consider a larger deductible. Most collision coverages are written with at least a $50 deductible. If you're willing to pay the first $100 of any collision repair, your premium for this coverage will be reduced 25 percent or more. A $150 deductible will save you an additional 20 percent, and so on. Many people figure they save money in the long run by handling the small repair bills themselves.
2. Buy a less expensive car. You'll pocket the difference and save on your insurance as well, if the less expensive car is in a lower rating category. Collision coverage for a six-cylinder compact, for example, typically costs $10 to $50 a year less than for a fullsized car of the same make.
3. Consider buying a good used car, or keep your new car a year or two longer. Rates for collision and comprehensive coverages are highest for cars of the current model year, drop and remain level for the next two model years, then drop again for cars four or more years old.
4. Consider dropping collision and comprehensive coverages on any car worth less than $1,000, if the car is paid for and you can afford to absorb the possible loss.
5. If you own more than one car, insure them all with the same company to obtain the 10 percent discount usually available on the additional cars.
6. Make sure you're in the correct rate classification. Your age, sex, and use of the car all affect the rate you pay.
7. Finally, maintain a good driving record. If your record is poor, you'll probably pay a higher rate than you would otherwise be charged.
Bodily injury coverages include bodily injury liability limits of $10.000 per person and $20,000 per accident, uninsured motorist insurance, and $500 per person medical payments insurance. Vehicle damage coverages include physical damage liability limits of $5,000 per accident, $50 deductible collision and $50 deductible fire, theft and comprehensive physical damage insurance. Rates are those filed by the Mutual Insurance Rating Bureau for an adult driver with a 1969 medium-priced car, private passenger use.