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American Academy of Actuaries Automobile Insurance Subcommittee

American Academy of Actuaries Automobile Insurance Subcommittee. Review of: Pay As You Drive Insurance Technical Analysis Patrick Crowe. May 19, 2003. American Academy of Actuaries Automobile Insurance Subcommittee. Conclusions:

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American Academy of Actuaries Automobile Insurance Subcommittee

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  1. American Academy of ActuariesAutomobile Insurance Subcommittee Review of: Pay As You Drive Insurance Technical Analysis Patrick Crowe May 19, 2003

  2. American Academy of ActuariesAutomobile Insurance Subcommittee • Conclusions: • Concept would require extensive study and the investment of capital to develop and implement this marketing concept • In a free market, it is probably best left up to each insurance company to determine whether or not to allocate capital to experiment with new concepts

  3. American Academy of ActuariesAutomobile Insurance Subcommittee • Conclusions, continued • Each risk enterprise must separately evaluate the cost, feasibility, consumer acceptance, and rate of return from such an investment in light of their specific individual needs • The regulatory environment varies by jurisdiction and is very much involved in this process

  4. American Academy of ActuariesAutomobile Insurance Subcommittee • Position: Rating plans should be developed in accordance with Actuarial Standards of Practice, specifically Actuarial Standard of Practice No. 12 concerning Risk Classification and the Risk Classification Statement of Principles.

  5. American Academy of ActuariesAutomobile Insurance Subcommittee • Standard of Practice #12 5.1 Methods to Demonstrate Cost Differences – A risk classification system is equitable if material differences in costs for risk characteristics are appropriately reflected in the rate. 5.3 Objectivity – A risk classification system should use objective characteristics to differentiate risks. A characteristic is considered objective if it is based on specifically determinable facts.

  6. American Academy of ActuariesAutomobile Insurance Subcommittee • Standard of Practice #12 5.4 Practicality and Cost Effectiveness – A balance is required between precision and the expense of administering a risk classification system. 5.10 Data – Relevant data should be verifiable and examined for reliability. Standard statistical tests should be applied when appropriate and necessary.

  7. Structuring Pay-As-You-Drive Automobile Insurance By Ed Coe U.S. Environmental Protection Agency May 19, 2003

  8. EPA and Automobile Insurance? • EPA developing voluntary measures to reduce emissions of Greenhouse Gases (GHG) and air pollutants • Pay-As-You-Drive (PAYD) Automobile Insurance Initiative is one of a suite of voluntary programs designed for this purpose • PAYD Automobile Insurance could encourage less driving • Benefits of less driving • Reduced emissions of GHG and air pollutants • Less road congestion • Less exposure on road, fewer accidents/claims

  9. EPA’s Role in PAYD Initiative • Education • Development of Outreach Materials • PAYD literature search • Brochures • Quarterly newsletter • Promote PAYD activities at the federal, state, and local levels • Development of a “Brand” (similar to “Energy Star”) is underway – used to identify environmentally friendly products, such as PAYD insurance • Voluntary Agreements with insurance companies, states (air quality offices, insurance commissioners), and organizations (actuarial, insurance associations, environmental, consumer)

  10. Overview • Implementation Issues • Options • Putting it all together – what a PAYD insurance program might look like

  11. Implementation Issues • How will vehicle travel be tracked? • How will premiums be structured? • How will consumers pay? And how often?

  12. Options for Tracking Vehicle Travel • Option 1: Odometer Audits • Manual reading of vehicle odometer • Option 2: On-Going Vehicle Tracking Technology • Global Positioning Systems (GPS) or • Global Locating Systems (GLS) • Option 3: Radio Frequency Identification Devices • Transmits odometer data electronically

  13. Tracking Option 1 (1-2):Odometer Audits • Manual reading of the odometer • Could be performed by: • Motor vehicle inspection facilities (state-operated or certified service station) • Other approved vehicle service facilities (e.g., Jiffy Lube) • Transmission of information: • Auditor sends mileage information via email, phone, fax, etc., or • Consumer sends copy of statement to insurance company

  14. Option 1 (2-2): Odometer Audits: Pros • Pros • No need to purchase technology • Likely could be conducted during required annual inspections or routine service • Odometer fraud is difficult and subject to criminal prosecution • Fewer privacy concerns

  15. Option 1 (2-2): Odometer Audits: Cons • Cons • Many states do not require annual inspections • Need to make arrangements for service stations to transmit data • Possible consumer burden if require initial audit at start of new policy • Need to pro-rate or reconcile audits that are not conducted at same time each year • Possibility of fraud if consumers send in odometer reading reports themselves

  16. Tracking Option 2 (1-4): GPS or GLS • GPS/GLS unit in policyholder’s vehicle tracks mileage • Data sent to insurance company • Collect by automated cell-phone transmission • Collect physically on RAM cards • Many vehicles already contain the technology (e.g., On-Star system); other consumers could pay to have the system added. • Consumer pays on-going fee for the service. However, allows for other technology-based services (LoJack, emergency notification, route-finding) • Can track where, when, and how long a vehicle is driven. Allows for more detailed pricing • By road location • By time of day

  17. Option 2 (2-4): GPS Technology(e.g. GA Tech Atlanta Pilot Project)

  18. Option 2 (3-4): Equipment Installation • Location selection: • Low profile • Box and wiring out of sight • No interference with driving • Provide for connections & airflow • Interior locations: • Under the rear seat • Under the front passenger seat • Under the driver seat • In the trunk • Behind rear seat in an SUV

  19. Option 2 (4-4):GPS/GLS: Pros and Cons • Pros: • Reduces effort for the consumer - no need to think about when to get odometer audit and report information • Insurance company can easily track detailed mileage • Consumers could potentially download mileage information from Internet or receive more detailed reports on driving patterns • Cons • More costly for consumers to install technology – partially offsets cost savings from PAYD insurance • Insurance company needs to set up system to collect data • Privacy concerns / confidentiality of information • Costs of switching technology to another vehicle

  20. Tracking Option 3 (1-2):Radio Frequency ID Devices • A tag or chip connected to an odometer sensor transmits current odometer readings and vehicle identification information to a central location • Only tracks the odometer, not location of vehicle • Could be designed to transmit once per week or per month, or other intervals

  21. Option 3 (2-2): Radio Frequency ID: Pros and Cons • Pros: • Less expensive than GPS technology • Reduces privacy concerns • Cons • Still requires consumers to install technology • Still requires insurance company to set up system to collect data

  22. Options for Rate Structure • Issue: How much of premium is variable? • Option 1: Premium totally on per-mile basis • Might have a “minimum miles” component • Option 2: Part fixed and part variable (e.g., $100 fixed, remainder based on mileage) • Issue: What is the rate? • Option 1: Same per-mile charge always in effect for an individual consumer (rate varies among consumers based on other risk factors) • Option 2: Per-mile charge varies by location, time of day (if using GPS/GLS technology)

  23. Options for Payment • Option 1: Pre-payment with end-of- term credit/refund • Option 2: Mileage billing

  24. Payment Option 1:Pre-Pay with Credit/Refund • Pay standard premium at beginning of term (based on average mileage, say 12,000 miles) • Receive credit/refund at end of term for unused miles • Would work well with annual odometer audits, but could be used with technology options • Ensures drivers do not run out of miles • Will entail some administrative cost to insurance company to process credit/refund – could apply toward next period’s premium

  25. Payment Option 2:Mileage Billing • Consumer pays baseline fee for a minimum number of miles (e.g., 2,000 miles) to cover insurance company costs or pays cost for expected mileage • Fee guarantees coverage during billing period • Insurance company bills consumer during each billing period for miles actually driven during the period • Would work well for monthly billing using vehicle tracking technologies • Provides direct signal to consumer about vehicle usage, like a telephone bill • Could charge a penalty if consumer does not pre-pay for actual miles traveled

  26. Billing/Statement Periods • Frequency that consumers receive bills or credit/refund • Annually: • Best if an odometer audit system is used • Might not provide sufficient feedback to consumers to have a large effect on driving behavior • Potentially fewer insurance company administrative costs • Monthly/Quarterly: • Gives consumers a better understanding of their driving • a greater incentive to reduce driving • Potentially greater insurance company administrative cost • Without GPS or other transmitters, consumers would need frequent odometer audits

  27. Putting it All Together:Examples • Example 1 • Annual odometer reading with credit/refund • Example 2 • Radio-frequency ID device tracking, semi-annual prepayment • Example 3 • GPS tracking with variable rates based on time and location, monthly billing

  28. PAYD Example 1 • Annual odometer reading, credit/refund at end of term • ABC Insurance Company Customer, Kate Smith • Kate purchases a new vehicle in February and selects PAYD insurance. Based on her age, driving record, and vehicle, credit/refund rate is $0.08 per mile if under 10,000 miles per year. • Initial odometer audit performed at the dealer where she purchased the vehicle shows 30 miles on vehicle. • Kate pays two semi-annual premiums of $500 ($1,000 per yr), just as in her regular plan. • Next February, Kate brings her vehicle in for its annual inspection. New vehicle mileage – 8,530 miles – is recorded and sent to ABC. • ABC calculates her credit/refund at $120 (10,000 miles - 8,500 miles = 1,500 miles x $0.08 per mile)

  29. PAYD Example 2 • Radio-frequency ID tracking with pre-payment • XYZ Insurance Company Customer, Tim Brown • Goes into authorized center or has insurance representative install ID vehicle device • Based on his driving record, he is given a rate of $0.10 per mile. • Tim pre-pays a semi-annual premium for $600 for 6,000 miles. • Tim drives 4,000 miles in 6 month period. Mileage information is transmitted to XYZ automatically. • XYZ sends Tim a credit/refund of $200 (2,000 miles x $0.10 per mile)

  30. PAYD Example 3 • GPS tracking with variable rates based on time of travel, monthly billing • Acme Insurance Company Customer, John Jones • John pays $200 at beginning of term to cover cost of GPS technology. He sets up billing so that bills are automatically paid through direct debit from his checking account each month. • Based on his driving record, his charge varies from $0.05 to $0.12 per mile, depending on time of day. • GPS transmits mileage and time of day information to Acme. John regularly checks his mileage balance on-line. • At the end of each month, John receives a statement identifying his mileage by time of day period and cost for period. Bill is paid directly through auto payment.

  31. Challenges • PAYD actuarially more accurate than current practice? • What components of PAYD should be adopted? • How can barriers to PAYD be overcome? • What other factors need to be considered?

  32. For More Information • Contact Ed Coe U.S. Environmental Protection Agency Office of Transportation & Air Quality Ariel Rios Bldg (6406J) 1200 Pennsylvania Ave NW Washington, DC 20460 phone: 202.564.8994 fax: 202.565.2057 email: coe.edmund@epa.gov

  33. Pay-as-you-drive Automobile Insurance:Regulatory/Technical Issues,and Ongoing Research Efforts Randall Guensler, Ph.D. Associate Professor School of Civil and Environmental Engineering Georgia Institute of Technology randall.guensler@ce.gatech.edu May 19, 2003

  34. Vehicle Insurance • Pooled risk (pooled premiums/pooled damages) • Driver skill and performance, transportation system conditions, vehicle characteristics, and random events • Insurers continually gather and analyze actuarial data • Predict losses for specific groups of drivers • Premium structure: lower cost for low-risk groups and higher cost for high-risk groups • Demographic variables • Moving violations and previous crashes • Geographic variables (zip codes) • Vehicle usage (recreation, commute, business)

  35. Driver Behavior and Risk-Taking • Pooled risk … but what is a driver’s “fair share” ? Off-peakfree flow PeakCongested Weekday and WeekendCrashes / 100 MVM (Zhou and Sisiopiku,1997)

  36. Goals of Pay-as-you-Drive (PAYD) Automobile Insurance • Further disaggregate risk groups, so that consumers pay for insurance more in proportion to their risk assumed in vehicle use • The more the consumer drives, and the higher the potential for being involved in a collision, the more they will pay for coverage • Mileage driven as a continuous variable • Driving conditions as a potential variable • Under PAYD programs, drivers would pay only for the insurance coverage or service that they needed • The subsidy of higher-risk drivers by other drivers within a risk group can be significantly reduced

  37. PAYD Outstanding Issues • Technology and program structure • How do you implement PAYD programs? • Consumer response • Will consumers change their travel behavior under PAYD? • Actuarial justification of rates • How can we demonstrate “fair pricing structures” to states? • Data do not link onroad activity, crash risk, and damage • Uncertain insurance industry impacts • Will insurance companies need to adjust business models? • Privacy concerns • Who will have access to personal data?

  38. Current State Regulatory Support for Pay-as-You-Drive Automobile Insurance Options Journal of Insurance Regulation In Press (2003)

  39. Georgia Tech Survey • Survey of State Insurance Commissioners • Survey goals: • Determine whether state regulations currently prohibit PAYD automobile insurance • Identify specific requirements that companies will have to meet to obtain approval for PAYD premium structures • 43 states participated • Non-participant states generally had smaller populations

  40. PAYD Program Structure • Conceptually, a wide variety of potential PAYD program structures and implementation strategies are possible • Premiums could be based upon a variety of factors: • Vehicle type, household driving history, miles per vehicle • Times of day and route selection for vehicle use • Implementation dependencies: • rate structure elements • need for accurate collection of data • miles driven, routes selected, etc. • means of collecting premiums • at the gasoline pump, private pre-paid debit accounts, direct credit billing, smart card systems, etc.

  41. PAYD Legal Status

  42. Approval Requirements for PAYD Premium Structures • 91% of the responding states require that actuarial data demonstrate that a new pricing structure will be fair and equitable • In making a “fair and equitable” determination, many states assess the number of years of data used • For example, New Mexico would require 3 years of average mileage information data

  43. Immediate Approval? • Can companies offer cent/mile insurance now, based upon annual fees by group and mileage? • 25 useful responses • Yes: 10 (40%) • No: 9 (36%) • Maybe: 6 (24%) • 3 will require actuarial data • 1 will approve using average miles of the group • 2 will require some new criteria (unspecified)

  44. Survey ResultsImpact on Consumer Equity • Literature indicates that PAYD can enhance equity • Most states did not have a position • It was not an issue in their state or they did not have enough information to form an opinion. • Four states indicated potential positive equity • One state indicated no impact • One state indicated negative equity impact • Their concept of equity focused entirely upon the total amount that a household pays for insurance and not upon whether the premiums are proportional to household driving risk

  45. Regulatory Barrier Conclusions • PAYD programs can be implemented in a majority of states under current regulations • Most states require a demonstration that the price structure is equitable and transparent • Educating the public and regulatory staff may be an important factor • More than 90 percent of responding states require actuarial data to justify requested rate structures • Insurance companies must determine that PAYD will be worthwhile before they will seek approval • Who goes first?

  46. PAYD Premium Structure Data Requirements • Insurance companies currently lack data necessary to directly link actual onroad travel data to loss risk • Fair and equitable PAYD premium structures • Data from instrumented vehicles (vehicles with black boxes for extended periods of time) are needed • The use of electronic monitoring devices is technically feasible and may be the best and most accurate means of implementing fair and equitable PAYD premiums • Security of data and prevention of electronic fraud need to be addressed

  47. Ongoing Research Efforts in Atlanta Atlanta’s Commuter Choice and Value Pricing Insurance Incentive Program May 2003 Update [Slides not Available for Distribution]

  48. Insurance Company View Greg Hayward State Farm Mutual Automobile Insurance Company May 19, 2003

  49. Insurance Company View • Insurance companies strive to accurately match rates to risks • More accurate risk assessment must significantly outweigh administrative costs • How much will PAYD add to the expense per policy?

  50. Insurance Company View • Mileage is used today, but in broad groups • Current use of mileage is prospective • Difficult and costly to administer current mileage groupings

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