Auto Insurance Fundamentals: Coverages and Ratemaking

1. 9/9/2005 Fox School, Temple University Auto Insurance Fundamentals:Coverages and Ratemaking  Michael R. Powers The Fox School, Temple University

2. Auto Insurance Coverages Bodily Injury Liability (BI) Property Damage Liability (PDL) First-Party Benefits (FPB) Uninsured Motorists (UM) Underinsured Motorists (UIM) Collision (Coll.) Comprehensive (Comp.)

3. Bodily Injury Liability (BI) Compensates for personal injury Economic damages (medical/income-loss) Non-economic damages (pain&suffering) Paid on third-party basis Required limits in Pennsylvania: $15,000 per person $30,000 per accident Optional higher limits available

4. Property Damage Liability (PDL) Compensates for physical damage Auto repairs/replacement Other property repairs/replacement Paid on third-party basis Required limit in Pennsylvania: $5,000 per accident Optional higher limits available

5. First-Party Benefits(FPB) Compensates for personal injury Economic damages only (medical/income-loss) Paid on first-party basis Required limit in Pennsylvania: $5,000 medical per person Optional coverages available: Higher limits of medical (including EMB) Income-loss Accidental death

6. Uninsured Motorists (UM) Compensates for personal injury Economic damages (medical/income-loss) Non-economic damages (pain&suffering) Paid on first-party basis Optional in Pennsylvania -- various limits available �Stacked� -- all insured�s autos �Unstacked� -- one auto at a time

7. Underinsured Motorists (UIM) Compensates for personal injury Economic damages (medical/income-loss) Non-economic damages (pain&suffering) Paid on first-party basis Optional in Pennsylvania -- various limits available �Stacked� -- all insured�s autos �Unstacked� -- one auto at a time

8. Collision (Coll.) Compensates for physical damage Auto and other property damaged in a collision Paid on first-party basis Optional in Pennsylvania -- various deductibles available

9. Comprehensive (Comp.) Compensates for physical damage Auto and other property damaged not in a collision (e.g., from vandalism, theft) Paid on first-party basis Optional in Pennsylvania -- various deductibles available

10. Pennsylvania Coverage Summary

11. Basic Auto Insurance Ratemaking Concepts Exposure: One unit of risk (= automobile) Claim Frequency = (#Claims)/(#Exposures) Claim Severity = ($ Losses)/(# Claims) Pure Premium = Frequency x Severity = ($ Losses)/(# Exposures) Loss Ratio = ($ Losses)/($ Premiums)

12. Losses (Often Including Allocated Loss Adj. Expenses) Calendar-Year Losses All paid losses + change in total loss reserves Accident-Year Losses All paid losses + case reserves + bulk reserves (IBNR)

13. AY Loss Development Loss Dev. Triangle (Hypothetical):

14. Premiums Written Premiums All premiums collected from new and renewal business in a given year Earned Premiums All premiums associated with coverage actually provided in a given year

15. Expenses Written Expenses All expenses gathered from new and renewal business in a given year Earned Expenses All expenses associated with coverage actually provided in a given year

16. Breakdown of Auto InsuranceRevenue Dollar

17. Basic Ratemaking Formulas Pure Premium Method: Dev./Trended AY Losses New Rate = + Trended Fixed Expenses (1 - v + i) x Earned Exposures Loss Ratio Method: Dev./Trended AY Losses Rate Change = + Trended Fixed Expenses (1 - v + i) x Earned Premiums

18. Final Modifications Increased limits factors Deductible factors Territorial relativities Driver class relativities Model-type/Model-year relativities