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9/9/2005 Fox School, Temple University
Auto Insurance Fundamentals:Coverages and Ratemaking
Michael R. Powers
The Fox School, Temple University
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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.)
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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
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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
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First-Party Benefits
(FPB)
Compensates for personal injury Economic damages only (medical/income-loss)
Paid on first-party basis Required limit in Pennsylvania:
$5,000 medical per person
Optional coverages available: Higher limits of medical (including EMB)
Income-loss
Accidental death
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Uninsured Motorists
(UM)
Compensates for personal injury Economic damages (medical/income-loss)
Non-economic damages (pain&suffering) Paid on first-party basis
Optional in Pennsylvania -- various
limits available Stacked -- all insureds autos
Unstacked -- one auto at a time
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Underinsured Motorists
(UIM)
Compensates for personal injury Economic damages (medical/income-loss)
Non-economic damages (pain&suffering)
Paid on first-party basis
Optional in Pennsylvania -- various
limits available Stacked -- all insureds autos
Unstacked -- one auto at a time
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Collision
(Coll.)
Compensates for physical damage
Auto and other property damaged in acollision
Paid on first-party basis
Optional in Pennsylvania -- variousdeductibles available
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Comprehensive
(Comp.)
Compensates for physical damage
Auto and other property damaged not ina collision (e.g., from vandalism, theft)
Paid on first-party basis
Optional in Pennsylvania -- variousdeductibles available
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Pennsylvania Coverage
Summary
First-Party Third-Party
PersonalInjury
FPB Basic Medical
FPB Med. Higher Limits/EMB
FPB Income-Loss
FPB Accidental Death
Uninsured Motorists*
Underinsured Motorists*
Bodily Injury Liab.
BI Higher Limits
PhysicalDamage
Collision*Comprehensive*
Property Damage Liab.PDL Higher Limits
optional coverages in italics
*subrogation permitted
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Basic Auto Insurance
Ratemaking Concepts
Exposure: One unit of risk (= automobile)
Claim Frequency = (#Claims)/(#Exposures)
Claim Severity = ($ Losses)/(# Claims)
Pure Premium = Frequency x Severity= ($ Losses)/(# Exposures)
Loss Ratio = ($ Losses)/($ Premiums)
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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)
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AY Loss
Development
Loss Dev. Triangle (Hypothetical):Report 1 Report 2 Report 3 Report 4 Ultimate
AY 95 21 38 61 76 85
AY 96 20 44 62 80
AY 97 23 43 67
AY 98 22 47
AY 99 24
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Premiums
Written Premiums
All premiums collected from new andrenewal business in a given year
Earned PremiumsAll premiums associated with coverageactually provided in a given year
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Expenses
Written Expenses
All expenses gathered from new andrenewal business in a given year
Earned ExpensesAll expenses associated withcoverage actually provided in a given
year
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Breakdown of Auto Insurance
Revenue Dollar
68%
13%
7%
2%6%
4%
Losses/ALAE General Exp. Comm./Aquis.
Premium Tax Income Tax Profit
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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
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Final
Modifications
Increased limits factors
Deductible factors
Territorial relativities
Driver class relativities
Model-type/Model-year relativities