Auto Insurance Premiums Research Articles

Estimating vehicle types effects on auto insurance premiums in São Paulo City: a GAMLSS Approach

This paper aims to identify how the different types of vehicle models impact insurance premiums for robbery and theft coverage in the city of São Paulo and considers as covariates the years of vehicle use, the risk classification, gender, and the driver’s age. To achieve this aim, we classify car models by using the database provided by the São Paulo Public Security Department; this database includes all the police reports registered for robbery and theft of vehicles in the city. We obtain the data for estimating the variables by using AUTOSEG, made available by SUSEP on its website, and use GAMLSS to estimate the frequency and severity parameters for the negative binomial and gamma distributions, respectively. As a result, unlike what was expected, the risk classifications were not significant for the average frequency of vehicle robbery and thefts, and it was possible to infer that vehicles classified as being at greater risk have a lower severity; that is, these vehicles are classified as popular.

Designing an Insurance Pricing Model using a Mathematical Approach

Purpose: Every time drivers take to the road, and with each mile that they drive, exposes themselves and others to the risk of an accident. Insurance premiums are only weakly linked to mileage, however, and have lump-sum characteristics largely. The result is too much driving, and too many accidents. The purpose of carrying out this research was to determine a model for calculating the premiums for Pay-As-You-Drive in automobile insurances. Methodology: To price Pay-As-You-Drvie auto insurance, we define a discounted collective risk model while the total number of claim has non-homogeneous Poisson distribution. By applying non-homogeneous Poisson distribution we can enter the mileage to the discounted collective risk model to the premiums for Pay-As-You-Drive in Automobile insurances. We apply the double Double Stochastic Poisson Process for modeling the DCRM. The Double Stochastic Poisson Process provides flexibility by letting the intensity not only depend on time but also by allowing it to be a stochastic process. Findings: By applying the doubly stochastic Poisson process to review the driver’s mileage in the model, the study found the distribution of discounted collective risk model and present the expected value of total loss for calculating the premiums. Recommendation: The current auto insurance pricing systems are inequitable because low-mileage drivers subsidize insurance costs for high-mileage drivers, and low-income people drive fewer miles on average. The study recommends a more efficient pricing systems model to find a good model for calculating the fair auto insurance premium. Keywords: Cox process, martingales, aggregate risk models, PAYD, actuarial mathematics.

Exploring Industry-Level Fairness of Auto Insurance Premiums by Statistical Modeling of Automobile Rate and Classification Data

The study of actuarial fairness in auto insurance has been an important issue in the decision making of rate regulation. Risk classification and estimating risk relativities through statistical modeling become essential to help achieve fairness in premium rates. However, because of minor adjustments to risk relativities allowed by regulation rules, the rates charged eventually may not align with the empirical risk relativities calculated from insurance loss data. Therefore, investigating the relationship between the premium rates and loss costs at different risk factor levels becomes important for studying insurance fairness, particularly from rate regulation perspectives. This work applies statistical models to rate and classification data from the automobile statistical plan to investigate the disparities between insurance premiums and loss costs. The focus is on major risk factors used in the rate regulation, as our goal is to address fairness at the industry level. Various statistical models have been constructed to validate the suitableness of the proposed methods that determine a fixed effect. The fixed effect caused by the disparity of loss cost and premium rates is estimated by those statistical models. Using Canadian data, we found that there are no significant excessive premiums charged at the industry level, but the disparity between loss cost and premiums is high for urban drivers at the industry level. This study will help better understand the extent of auto insurance fairness at the industry level across different insured groups characterized by risk factor levels. The proposed fixed-effect models can also reveal the overall average loss ratio, which can tell us the fairness at the industry level when compared to loss ratios by the regulation rules.

Medical cannabis and automobile accidents: Evidence from auto insurance.

While many states have legalized medical cannabis, many unintended consequences remain under-studied. We focus on one potential detriment-the effect of cannabis legalization on automobile safety. We examine this relationship through auto insurance premiums. Employing a modern difference-in-differences framework and zip code-level premium data from 2014 to 2019, we find that premiums declined, on average, by $22 per year following medical cannabis legalization. The effect is more substantial in areas near a dispensary and in areas with a higher prevalence of drunk driving before legalization. We estimate that existing legalization has reduced health expenditures related to auto accidents by almost $820 million per year with the potential for a further $350 million reduction if legalized nationally.

Auto insurance premiums in Ghana: An Autoregressive Distributed Lag model approach to risk exposure variables

This study examined risk exposure and auto insurance premium determinants in Ghana. We analysed an existing data set of 23 434 policies (without claims = 84.1%, policies with claims = 15.9%; comprehensive policies = 48.0%, third-party policies = 52.0%) applying the Autoregressive Distributed Lag (ARDL) model, controlling for driver demographics, value of car, and car usage variables. Findings indicate policyholders’ age significantly determine premiums charges. Additionally, auto seating capacity significantly influenced third-party rather than comprehensive premiums, and auto’s cubic capacity had no significant impact on premium charges. Pricing system impact premiums were influenced by policyholders’ characteristics more than variables from the insured vehicle. These findings suggest that policyholders’ age (novice drivers) and vehicles with many occupants increases auto insurers risk exposure.

Predictive risk analysis using a collective risk model: Choosing between past frequency and aggregate severity information

The typical risk classification procedure in the insurance field consists of a priori risk classification based on observable risk characteristics and a posteriori risk classification where premiums are adjusted to reflect claim histories. While using the full claim history data is optimal in a posteriori risk classification, some insurance sectors only use partial information to determine the appropriate premium to charge. Examples include auto insurance premiums being calculated based on past claim frequencies, and aggregate severities used to decide workers’ compensation. The motivation is to have a simplified and efficient a posteriori risk classification procedure, customized to the context involved. This study compares the relative efficiency of the two simplified a posteriori risk classifications, that is, those based on frequency and severity. It provides a mathematical framework to assist practitioners in choosing the most appropriate practice.

Buckle Up: The Long, Winding Road to Improved Auto Insurance Premiums in Louisiana

Currently, the State of Louisiana has the second most expensive auto insurance in the nation. Louisiana ranks first in an even more devastating automobile insurance statistic, unaffordability. An already poor state simply cannot afford the repercussions of inaction. The higher auto insurance premiums rise, the more Louisiana citizens will forgo insurance coverage, resulting in loss of compensation for victims of automobile accidents and loss of protection for tortfeasors. Many peg the Louisiana tort system as a key factor in the automobile insurance crisis and call for tort reform. This Article closely examines the various legislative efforts of Louisiana tort reform, specifically, proposed amendments to Louisiana Revised Statutes Section 32:295.1 Subsection E, which currently prohibits the admission of evidence that the plaintiff was not wearing a seat belt for purposes of comparative fault and reduction of damages. Several legislators have argued reducing insurance payouts in Louisiana will in turn reduce cost shifting to Louisiana consumers. This Article reviews various Louisiana House and Senate Bills proposed over the last two decades, incorporates interviews with legislators who presented those bills, and distinguishes Louisiana law with the laws of states with the highest and lowest insurance cost, Michigan and Maine respectively. In addition, this Article examines the pros and cons of various proposed alternative tort reform solutions aimed at reducing automobile insurance costs. The author concludes that because the law has sat idle for nearly two decades, it is unknown whether seat-belt evidence admissibility will reduce automobile insurance costs. Tangible data simply does not exist. The author calls for further review of current and proposed Louisiana law and rapid action so that Louisiana citizens do not continue to endure such costly premiums.

Research on Influencing Factors of Auto Insurance Premium under the Background of Marketization Reform—Empirical Analysis Based on VAR Model

In recent years, my country’s economy has grown steadily, and the insurance industry and the automotive industry have a good development trend in the macro environment. Since 2015, the China Insurance Regulatory Commission has carried out a series of auto insurance rate reforms for different stages of the market to promote its standardized development. In this paper, four explanatory variables are selected by multidimensional analysis method. Based on panel data, econometrics is used to establish VAR model and fixed benefit model to analyze the impact of China’s motor vehicle insurance premium income. Finally, variables and regression equations with significant impact are determined, and provide policy advice.

The use of context-sensitive insurance telematics data in auto insurance rate making

Historically, auto insurers use various socio-demographic underwriting factors to differentiate driver risks. With the invention of GPS devices, information such as mileage, traffic condition and driving habits can be incorporated into auto insurance premium calculation. Several major auto insurance companies have offered usage based insurance (UBI) programs where auto insurance premiums are sensitive to actual GPS readings combined with driver’s driving behavior. However, given that telematics data are proprietary to the insurance companies that collect such data, the accessibility of UBI is extremely limited.In this research we showcase how second-by-second GPS data can be integrated into existing or new auto insurance pricing structures. We use two types of data: real-time GPS trajectory data collected using a traffic app, as well as survey data. We incorporate vehicle trajectories and accident data to quantify the relationship between driving hazard and accidents with the goal of establishing the linkage between driving risks and accident costs. GPS data considered in this study include not only tradition UBI factors, but also the unique contextual-based risk measurements that compares the driving speed of the vehicle with other drivers on the same road segment. Although smartphone data is used in this study, the methodology developed can be applied to GPS trajectory data collected from other devices such as on-board diagnostics (OBD) or black box solutions. We find that hard brakes, hard starts, peak time travel, speeding as well as driving at a speed significantly different from traffic flow are highly correlated with accident rate. We illustrate the potential underwriting loss an insurer may incur resulting from adverse selection if omitting pertinent risk factors. The results of our study can help insurance companies that are interested in getting into the UBI area set up their auto insurance premium rates.

Accounting for Driver Distraction and Socioeconomic Characteristics in a Crash Risk Index: Naturalistic Driving Study

Distracted driving has long been acknowledged as one of the main contributors to crashes in the United States. According to past studies, driving behavior proved to be influenced by the socioeconomic characteristics of drivers. However, few studies attempted to quantify that influence. This study proposed a crash risk index (CRI) to estimate the crash risk associated with the socioeconomic characteristics of drivers and their tendency to experience distracted driving. The analysis was conducted with data from the SHRP 2 Naturalistic Driving Study. The proposed CRI was developed on a grading system of three measures: the crash risk associated with performing secondary tasks during driving, the effect of socioeconomic attributes (e.g., age) on the likelihood of engagement in secondary tasks, and the effect of specific categories within each socioeconomic attribute (e.g., age older than 60) on the likelihood of engagement in secondary tasks. Logistic regression analysis was performed on the secondary tasks, socioeconomic attributes, and specific socioeconomic characteristics. The results identified the significant secondary tasks with high crash risk and the socioeconomic characteristics with significant effect on determining drivers’ involvement in secondary tasks in each tested parameter. These results were used to quantify the grading system measures and hence estimate the proposed CRI. This index indicates the relative crash risk associated with the socioeconomic characteristics of drivers and considers the possibility of engagement in secondary tasks. The proposed CRI and the associated grading system are plausible methods for estimating auto insurance premiums.

CREDIT CRUNCHAND INSURANCE CONSUMPTION: THE AFTERMATHOF THE SUBPRIME MORTGAGE CRISIS

AbstractUsing cross‐state panel data of the U.S. personal auto insurance premiums from 2007 to 2012, this study provides evidence that consumer purchases of insurance were reduced by more than expected from losses of risk exposure during and after the subprime mortgage crisis. Analyses show that the credit crunch of auto loans and a deterioration of net worth in housing resulting from the bursting housing bubble contributed to the reduced consumption of auto insurance. This result is robust even after controlling for associated factors, such as the insurance price, personal spending on vehicles, and general consumption. These findings provide evidence for a real effect of the financial crisis.

Deregulation, Pricing Strategies, and Claim Behavior in the Taiwan Automobile Insurance Market

Stringent pricing regulations have long been in effect in the Taiwan automobile insurance market. In April 2009, a pricing deregulation was adopted, enabling insurers to establish their own auto insurance premium rates. This study examines the effects of deregulation in terms of three hypotheses that we propose pertaining to market shares, loading factors, and last policy month claims. The quantitative analysis results show that pricing deregulation prompts insurers to lower their rates. The effects of deregulation for insurers are determined by not only the decision to deduct premiums and the deduction percentages, but also by policy type.

Editorial: The economics of risk

Vol. 12 of The Mathematics Enthusiast addresses the notion of risk from a variety of viewpoints, mathematical or otherwise. This editorial examines risk, starting from a historical perspective to frame current educational policies that have been influenced by ensuing economic principles. Risk has historically been associated with numerous cultures in the context of dice games or gambling (Sriraman & Lee, 2014) .Risk was first empiricized in the financial sector during the advent of western colonialism in late 15th century when ships made voyages to the East and investors needed assurance about the risk associated in relation to the payout from a successful voyage. One sees the birth of maritime insurance during this period to address the needs of the mercantile sector which invested in risky shipping ventures. Another area in which risk was empiricized and calculated was in the domain of life insurance. It is well known among historians of statistics, that Edmond Halley in the 17th century constructed a life table to demonstrate how premiums can be calculated as a function of age. Even though the death of an individual was unpredictable, data on patterns of longevity for groups became a basis of study whereby risk could be more accurately assessed for the purpose of calculating premiums or pensions (Halley, 1693).The economic dimension of risk in the 21st century is ubiquitous with existence in the developed world and forms the basis of neo-liberal economies and their associated markets. This ranges from auto-insurance premiums to investments made by governments for research, development and education. Educational reform in the U.S has been tied to risk as seen in the 1983 report from the National Commission on Excellence in Education under the auspices of the Reagan administration. The report entitled "A Nation at Risk" is often cited in the literature when addressing the failure of public schools and the need for reform in public education. It became somewhat of a pre-cursor for the private sector to intervene in public education since tax dollars spent on schools needed to be accounted for in terms of deliverable and measurable outcomes. Subsequent legislation in the form of "No Child Left Behind" (NCLB) enacted in 2001 held public schools accountable on the basis of student performance. The goal of this legislation was not only to reform public education but also to systematically close public schools that placed "students at risk" through probationary measures on the basis of student performance outcomes on standardized tests. By holding public schools and teachers responsible for inadequately addressing student needs, the onus of reform could be shifted to charter and private schools. One can argue that the increased role of the federal government in public education in the U.S has resulted in the marketization of public education by allowing the private sector to fill in the gap left by public schools. Funding initiatives such as the "Race to the Top" which were part of the American Recovery and Reinvestment Act of2009 furthered market economy goals of "competition" to put into place a reward system for states and schools that adhered to educational policies for schools anchored in performance based assessments and other measurable deliverables.A consequence of this has been a further increase in charter schools in states like Illinois and a demise of the public school system. …

Credit Crunch and Insurance Consumption: The Aftermath of the Subprime Mortgage Crisis

Using cross-state panel auto insurance premium data from 2007 to 2012 in the U.S., this study provides evidence that individual purchases of private auto insurance were excessively reduced during and after the U.S. subprime mortgage. Analyses show that the credit crunch triggered by a shock in house prices was a major contributing factor of the reduced consumption of auto insurance during and after the crisis. This result is robust even after controlling for associated factors such as insurance prices, personal spending on vehicles and general consumption, recession indicators and the use of alternative transportation. Tests also find that a drop in house prices was also related to the deterioration of underwriting performance. These findings provide evidence for a real effect of the banking crisis.

Redlining or risk? A spatial analysis of auto insurance rates in Los Angeles

AbstractAuto insurance rates can vary dramatically, with much higher premiums in poor and minority areas than elsewhere, even after accounting for individual characteristics, driving history, and coverage. This paper uses a unique data set to examine the relative influence of place‐based socioeconomic characteristics (or redlining) and place‐based risk factors on the place‐based component of automobile insurance premiums. We use a novel approach of combining tract‐level census data and car insurance rate quotes from multiple companies for sub‐areas within the city of Los Angeles. The quotes are for a hypothetical individual with identical demographic and auto characteristics, driving records, and insurance coverage. This method allows the individual demographic and driving record to be fixed. Multivariate models are then used to estimate the independent contributions of these risk and redlining factors to the place‐based component of the car insurance premium. We find that both risk and redlining factors are associated with variations in insurance costs in the place‐based component, with black and poor neighborhoods being adversely affected, although risk factors are stronger predictors. However, even after risk factors are taken into account in the model specification, SES factors remain statistically significant. Moreover, simulations show that redlining factors explain more of the gap in auto insurance premiums between black (and Latino) and white neighborhoods and between poor and nonpoor neighborhoods. The findings do not appear sensitive to the individual characteristics of the hypothetical driver. © 2007 by the Association for Public Policy Analysis and Management

Quebec's Comprehensive Auto No-Fault Scheme and the Failure of Any of the United States to Follow

Although Quebec's no-fault auto insurance scheme has served for 20 years as an exemplary model to follow, so far not one of the United States has adopted anything even close to it. This article examines the reasons for that failure, both in California and throughout the country. Emphasis is given to several factors that stand in the way of U.S. reform and that may distinguish states in the U.S. from Canadian provinces generally and Quebec in particular: 1. State politics — the power of the lawyers who represent victims, the position of the insurers, and the structure of state government. 2. Public perceptions — negative attitudes towards government, the insurance industry, and the prospects of saving money on auto insurance premiums. 3. Traditions—the ideological strength of individualism and ideological weakness of collective responsibility. 4. Tradeoffs — doing away with the tort system means giving up more in the U.S. than elsewhere. 5. Policy concerns — fears about safety, costs, and the « slippery slope ». Finally, the possibility that one or more U.S. states might in the future evolve towards the Quebec solution is explored.

Market Structure and Performance in Private Passenger Automobile Insurance

INTRODUCTION Despite the proliferation of research on the relationship between concentration and profitability in many industries,(1) the existence of such a relationship in the property and liability insurance sector has not received much attention in the literature. Carroll (1993) examines this issue for the workers compensation market and is unable to find the positive relationship that is predicted by industrial organization theory. Since automobile insurance is the largest source of income for property-liability insurers(2) and competition in consumer markets tends to be local, concentration may be a more significant factor in pricing for this line than it is for workers' compensation. Although many companies sell automobile insurance, most are affiliated with larger groups of insurers and a fairly small number of companies control a large share of the business in the United States, with more concentration in certain states.(3) Under these circumstances, market structure may play a greater role in the pricing of private passenger auto insurance. The auto insurance industry has been under fire in the last two decades and has been accused of making excessive profits by colluding to restrict supply and keep prices artificially high. The passage of Proposition 103 in the state of California demonstrates that such beliefs may be widely held and can have dramatic consequences. Legislative proposals at the federal level, intended to repeal the antitrust exemption for insurers under the McCarran Ferguson Act, can also be attributed to this type of consumer attitude. Although the last decade has been a period of rising auto insurance premiums, particularly in certain geographical areas, the industry has consistently argued that higher prices are the result of rising costs, and that profit margins are slim.(4) This argument apparently won judicial support in California where the voter-approved twenty percent rollback of premiums was halted based on evidence that such a reduction would imply negative profits for many insurers. The purpose of this study is to investigate the relationship between profitability and concentration in the United States private-passenger automobile insurance industry. Since antitrust regulation is based on the assumption that concentration promotes collusive behavior, the results of this study should prove valuable to policy-makers, industry professionals and, ultimately, to consumers as well. The next section of the paper details the theoretical background and reviews previous empirical studies. The third section presents the data and methodology followed by a summary of the empirical results. Conclusions and policy implications are provided in the final section of the paper. BACKGROUND The industrial organization literature provides two competing hypotheses for the relationship that exists between performance and concentration. The structure-conduct-performance paradigm (SCP) suggests that market share concentration creates conditions for collusive anti-competitive behavior that can lead to monopoly profits. The SCP paradigm therefore predicts a positive relationship between profitability and market concentration level. The efficient structure (ES) hypothesis offers an alternative explanation for the positive relationship between profit and concentration. First proposed by Demsetz (1973), the ES hypothesis suggests that firms with superior efficiency (lower costs) will gain a larger market share. Thus, if larger firms have a comparative advantage in production or services provided, they may achieve higher profits without resorting to collusive measures such as raising prices or restricting supply. From a public policy standpoint, the SCP paradigm and the ES hypothesis have conflicting implications for industrial regulation. The first provides justification for strict antitrust regulation and the latter would imply that an unrestricted marketplace would result in the lowest prices to consumers. …

The Effect of Taxes and Insurance Costs On Automobile Registrations in the United States

We investigate the determinants of United States automobile registrations in states in 1986, focusing on state and local taxes and fees, and on auto insurance premiums. Using data on state tax and fee structures and the results of a phone survey of states where automobiles are subject to property taxes, we calculate tax and fee costs for a "new" and an "old" car. Regression results show that new car taxes have httle effect on registrations, probably because owners respond to higher taxes by buying older, cheaper cars. Higher old car taxes reduce registrations because low-income owners cannot buy older or cheaper cars and thereby abandon ownership. Insurance premiums appear to have a negative effect on registrations.

Husband-Wife Decision Making in Purchasing and Renewing Auto Insurance

Intrafamily decision making relative to auto insurance purchasing was examined for a U.S. sample of 1,327 families. The husband was found to be primarily responsible for making two of the more important auto insurance decisions company selection and premium payment. The wife's involvement in these decisions was found to be contingent on her contribution to the family's financial resources. A high degree of consistency was found between the family member making these two decisions. Consistency was also observed between the attitudinal measures of decision responsibility and behavioral surrogates of decision making involvement. Consideration of both family members in developing advertising and personal selling strategies in the auto insurance industry are suggested and implications for further research are discussed. Much of the literature on household purchasing behavior in insurance has sought to identify correlates of consumption or expenditures. This research has associated insurance purchasing behavior with various demographic and socioeconomic variables [ 1, 3, 10] . Household characteristics such as income, number of children, age, and total assets were found to be significant explanatory variables when associated with insurance premium expenditures and the amount of insurance purchased. Comparatively less research has dealt with intrahousehold interaction in the purchase of insurance. The differential influence of the husband and wife however, has been noted in several studies. In one insurance study, presence of the wife at the sales interview was associated with a considerably higher rate of sales [13]. In another study, it was found that the family was less likely to purchase life insurance if the husband and wife discussed the insurance purchase without the agent present [16]. While these studies dealt with household purchasing behavior for life insurance, only limited research has been conducted on husband-wife interaction in purchasing auto insurance [6, 17]. Auto insurance, however, has become a major household expenditure with a recent survey [2] showing that almost half of the insurance consumers pay in excess of $300 annually for auto insurance. During 1976, consumers paid almost $24 billion in auto insurance premiums. In addition, while life insurance is usually an optional purchase, auto insurance in a majority of states is one of the principal methods of satisfying state financial responsibility laws when operating a motor vehicle, while in several other states purchase of auto insurance is compulsory. These factors indicate the need to study the purchase of auto insurance and in particular the involvement of family members during purchase and renewal. Terry L. Childers is in the University of Wisconsin graduate school and 0. C. Ferrell is in the Department of Marketing and Management of Illinois State University.

The Effect of a Suburban Driving Population on Urban Auto Insurance Premiums

This study addresses one aspect of the issue regarding the allocation of losses to territorial rating groups. Specifically, the study refutes the proposal that losses should be allocated to a rating group on the basis of its drivers' contribution to congestion and accident frequency rather than the usual method of allocation on the basis of the group's actual loss experience. Further, some of the complexities and inherent errors of a system that allocates losses on the basis of contribution to congestion are explored. In conducting the study, claim data are used in conjunction with two traffic congestion/accident frequency models. Highly congested urban areas generally have larger auto insurance losses per insured than their less congested suburban counterparts. Auto insurance premiums tend to reflect this differential loss pattern by pairing higher priced rating territories with higher loss urban areas. Some critics of the auto insurance industry (notably former Commissioner Stone of Massachusetts) have contended that such pricing is unfair to urban dwellers [ 1]. They have supported their contentions by arguing that accident frequency is affected by congestion and that increased congestion is caused by nonurban drivers commuting into urban areas. The auto insurance industry response to the criticism has been that the pricing mechanism already accounts for the involvement of nonurban drivers in urban accidents. The mechanism which assigns losses to the garaging location of the at-fault vehicles charges nonurban drivers for those accidents they cause in the urban area. This procedure allegedly fails to account adequately for the effect of increased congestion within urban areas. For example, even if two urban drivers collide, the critics contend that the fault (causative factor) is the increased traffic density created by an influx of nonurban cars. The congestion (density) argument has proven to be a difficult criticism for the auto insurance industry to refute using traditional approaches. Moreover, two studies seemingly corroborated the argument [2 and 3]. The study Mark D. Brissman is an Assistant Research Administrator in the Research Department of State Farm Mutual Automobile Insurance Company. He holds B.S. degrees in Mathematics and Biology and an M.S. in Industrial Administration from Purdue University. Mr. Brissman also holds the CPCU designation. The author is indebted to the editor of the Journal, two anonymous Journal referees, and the author's professional colleagues for their assistance in this project.