Car Owners Pay Too Much For Liability: Conning
Insurers are requiring car owners to pay liability premiums inflated by losses caused by light trucks, sport utility vehicles and vans, according to a recent study.
Conning Research and Consulting Inc. in New York found that insurers are rating light trucks, SUVs and vans for liability premium calculation purposes the same as private passenger cars–despite data showing such vehicles present greater bodily injury and property damage risks than private passenger cars.
"For years, car owners have been subsidizing the light truck owners' premiums, and the personal automobile insurance industry has been slow to respond," said Michael Weinstein, director of research at Conning.
Mr. Weinstein noted that the light truck, SUV and van owners should be paying about 15 percent more for liability coverage, and the car owners should be paying about 15 percent less, for a total differential of approximately 30 percent.
"Given the highly competitive nature of the personal lines insurance industry and the challenge of producing profits, one has to ask–why have most underwriters not yet differentiated broadly between light trucks/SUVs and passenger cars?" asked Mr. Weinstein.
"Vehicles that are bigger and heavier and generally more difficult to handle have the capacity to cause more damage and higher injury rates," Mr. Weinstein pointed out. The Conning study provides the hard data to back up that seemingly common-sense conclusion, he noted.
So why havent most insurers been accounting for this difference in their premium calculations?
"Not all companies have sufficient data to back up a rating change," Mr. Weinstein indicated. "To study data and build systems is time consuming and competes for resources with other projects," he added. "Also, insurers may be concerned about losing business if they increase rates for certain vehicles."
"A few of the larger insurers have recognized that the problem exists and are beginning to respond," said Mr. Weinstein. "However, as the light truck category continues to expandto about 40 percent of the marketit is clear that the success of every personal auto company is contingent on differential pricing. Those that delay face adverse selection."
Some insurers have recognized that risk exposure justifies a different liability pricing approach based on vehicle type.
Progressive Casualty Insurance Company, based in Mayfield Village, Ohio, has had different rates for cars, light truck, SUVs and vans since 1988, according to spokesperson Mary Beth Mc Dade. "Its all about accurate pricing," Ms. McDade noted." Trucks have higher bodily injury and property damage rates because the pricing has to match the risk," she added.
Dick Leudke, spokesperson for Bloomington, Ill.-based State Farm Insurance Companies, said that the company already has rates based on vehicle type for collision, comprehensive and Personal Injury Protection (no-fault), and is looking into doing the same for liability.
"We havent made the determination yet whether it [vehicle-specific rating] should be done for auto liability," Mr. Leudke said. "It is a weighing process–we must weigh the value of being able to differentiate based on vehicle type versus the administrative costs involved." Mr. Leudke pointed out that the rating process balances interests and cannot fully satisfy everyone.
The "Light Truck/SUV Underwriting: The Differences Matter" study can be purchased from Conning by calling (888) 707-1177 or by visiting the company's Web site at www.conningresearch.com.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.