CPCU 555: Ch. 2 - Concepts

Other Regulatory Issues that Affect Coverages & Rates

1. Rising health care cost - PIP: Cost of treating those injured in auto accidents increase insurance costs. 2. Environmental Issues - Auto main source of pollution emissions; State regulation increases auto cost 3. Vehicle modification - increase value of auto; attacts theives; cause severe accidents

Choice No-Fault Plans

Insured can choose to be on a modified no fault plan. Y - Can't Sue at fault driver; N - Can Sue at fault driver.

Describe the Matching Price to Exposure Process

Insureds are placed into *rating categorie*s that reflect different levels of exposure to loss (e.g. Tiers).

Add on plans

Insurer offers optional PIP coverage. Insured can collect from insurer or driver. *retaining right to sue.*

How does Subrogation with No Fault Laws

Insurers can collect payment from at fault parties to the extent that no fault benefits were paid.

Limits Trigger

Liability Limits < Injured persons UIM coverage

When is Proof of Financial Responsibility (FR) is Required (4)

• *After* Dollar Limit: BI or PD exceeding a certain dollar amount • *After* Conviction: of serious driving offense • *After* Final Judgement: failure to pay • *After* Penalties: failure provide proof of insurance

Disadvantages of Financial Responsibility Laws (3)

• *Effective Date:* Requirements effective *only after* accident, conviction or judgment • *No payment guarantee:* Some may not be compensated • *Incomplete Indemnity:* Injured may not be fully indemnified

Disadvantages of UM Coverage (4)

• *Inadequate Compensation:* Injured may not be fully compensated • Establish Legal Responsibility (must) • Property damage is excluded (many states) • Victim pays as part of premium to insurer in case of accident

Disadvantages of Compulsory Auto Insurance Laws (6)

• *No guarantee:* victim compensation • *Incomplete protection* • *Uninsured motorists:* may not reduce the # • *Insurer Profitability:* Negative impact due to less selection power • *Rates* high for good drivers • *Does not reduce number* of accidents

Examples of Injuries that Meet Verbal Thresholds

• Death • Permanent disfigurement • Permanent loss of bodily funciton • Significant and permanent of loss of function

What are Unsatisfied Judgments?

• Injured can collect from fund after judgment against driver • Max paid is = to minimum insurance requirement • Negligent driver's license is revoked until fund is reimbursed

Disadvantages of UIM (2)

• Injured may not be fully compensated • Victim pays premium in case of accident

Examples of Proof of Financial Responsibility (3)

• Liability insurance • Surety bond • Certificate of self-insurance

Uninsured Motorist Coverage

• Mandatory in many states • Provides protection against uninsured drivers • Applies when BI, hit/run or driver whose insurer is insolvent

Types of Thresholds

• Monetary - value losses must exceed before injured can sue • Verbal - must meet verbal description of serious injuries to gain right to sue. May include a minimum disability period.

*Under*insured Motorist (UIM) Coverage

• Occurs when neg. driver has limits lower than the injured persons UIM coverage or insufficient to all damages. • Trigger types: Damages and Limits

Modified No Fault Plans

• Plaices *some* restrictions on the right to sue • Injured collect from own insurers (through PIP) • Injured can sue for the remaining balance of losses and noneconomic losses if it exceeds state threshold

Approaches to Compensating Accident Victims (6)

• Tort liability system • Financial responsibility laws • Compulsory insurance laws • Uninsured motorist coverage • Underinsurance motorist coverage • No-Fault insurance

Residual Market

(aka Shared Market) Makes insurance available for drivers who cannot obtain it voluntarily - shared risk mechanism.

Voluntary Market Programs are also Called...

(aka) Nonstandard Insurance Programs. A program in which insurers voluntarily offer insurance to high risk drivers.

Services Provided by Voluntary Insurers

- Accept their own applications - Service their policies - Pay their claims/expenses - Retain full responsibility for their own UW results

Auto Discounts and Credits

- Anti-theft Device - Passive restraints (airbags) - Reduced auto use by student who attends school away - Multi-policy - Renewal/Anniversary discount - years of continous coverage

How and Why do Regulators Monitor Rates?

- Because insurers go through competitve cycles in pricing. - Rates monitored through state rate filings - Regulators make sure pricing is reasonable, adequate and not unfairly discriminatory

How to Auto Insurers Compete?

- By lowering rates - High UW losses and expenses lead = low profits which leads insurers to raise rates and be more selective.

Other Rating Factors

- Driving record - Driver education - Good student - Multi-car policy - Years of driving experience - Credit based insurance score - Type of auto - Deductibles - Liability Limits

Purpose of State Ins. Rating Laws

- Ensure rates charged to the extent neccessary to pay all claims and expenses - Reasonable for the LE presented - Not unfairly discriminatory.

Characteristics of High Risk Drivers

- Habitually violate traffic laws - Excessive number of accidents - Convicted of serious offenses

How Do Reinsurance Facilities Work?

- Insurers accept all auto ins. App and provides insurance and handles claim - *Insurer has the option of assigning risk to a reinsurance facility.* - All insurers share losses and expenses of reinsurance facility in proportion with what they write.

What is a State Fund? Who Uses it?

- Maryland has a state fund. - A state fund is a resource the state operates that subsidlizes UW losses but requires private insurers to reimburse. They can also recover losses by surcharging their own insured.

Benefits Paid w/ No Fault Laws (6)

- Medical Expenses - Rehab - Loss of Earnings - Expenses for essential services - Funeral expenses - Survivors' loss benefits

Advantage of Compulsory Auto Insurance Laws (3)

- Motorist must provide proof of financial responsibility *before* an accident occurs. - Insurer must verify or notify state of cancellation/non-renewal.; - Driver can post bond or securities.; - *Goes beyond FRL to ensure compensation of victims.*

Educational Objective 4

- Rating factors - Matching price to exposure - Competition - Other regulatory issues

How Do Joint Underwriting Associations Work?

- States use as an alternative to the Automobile Insurance Plan - A limited number of insurers are designated to service drivers - Apps submitted to JUA or service insurer - Auto insurers pay a proportionate share of total UW losses and expenses based on share of voluntary insurance written in state.

How are Policies Rated?

- Varies by state and insurer - Rating is automated - Discounts/credits reflect a change in frequency/severity of loss

Consequences of Failure to Show FR Proof (2)

1) License suspension 2) Vehicle Registration Suspension

Measures Used to Minimize the Disadvantage of Compulsory Insurance (3)

1. *Low cost policies* - designed to reduce the # of uninsured; help low income 2. *No pay, no play laws* - prohibit uninsured from filing suits for noneconomic damages (pain and suffering) 3. *Unsatisfied judgment funds* - license revoked until fund is reimbursed

Disadvantage of Tort Liability System (3)

1. *Time delay:* associated with settlement/court process 2. *Signficant Cost:* Legal and administrative costs 3. *Excessive Awards:* Punitive awards can be excessive

Three Residual Market Programs

1. Auto Insurance Plans 2. Joint Underwriting Associations (JUA) 3. Reinsurance Facility 4. StateFund

Purpose of No Fault Auto Insurance (3)

1. Avoid the cost and time to determine liability under tort system 2. Take burden off state court system 3. Minimize costs

Special Restrictions Used to Reduce Risk in VMP

1. Coverage offered at state limits 2. Limited medical payments 3. Collision coverage only available w/ high deductible 4. Higher premiums charged

Requirements of Auto Insurance Plans

1. Driver must show *proof* of inability to obtain coverage 2. *Minimum State Limits* (most plans offer higher limits). 3. Felons (w/in 36 mos), unlicensed and habitual violators are *ineligible* 4. *Premiums are higher* than voluntary market

Advantages of No Fault Auto Insurance (5)

1. Eliminate the need to *determine fault* 2. Eliminate *inequities in claim payments* 3. Expand the *limited scope of the tort system* 4. Decrease the amount of *premium dollars* used for claim/legal cost 5. Reduce *delays in payments*

Three Reasons Vehicle Modifications Increase Insurance

1. Modifications can increase auto values = higher claim payments 2. Can attract thieves = higher claim payments 3. Can improve performance = more accidents

Types of No Fault Laws

1. Modified-no fault plans (Y) 2. Add on plans (n) 3. Choice no-fault plans (Maybe)

Right to Sue No Fault Plans

1. Modified-no fault plans - Y 2. Add on plans - N 3. Choice no-fault plans - Only if modified selected (#1)

Advantages Financial Responsibility Laws (2)

1. Offers some protections to injured. 2. Works with tort liability laws to ensure negligent drivers have $ to pay and are held responsible.

Disadvantages of No Fault Auto Insurance (4)

1. Overstated savings projections 2. Penalizes safe drivers 3. No pain and suffering 4. Increase fraud

Reasons No Fault Laws Exclude Property Damage (3)

1. PD amounts are small and confined to vehicles 2. PD amounts can be determined without difficulty 3. Insurers can settle claims for damage quickly

Four Key Auto Insurance Rate Regulation Concerns

1. Rating Factors 2. Matching Price to Exposure 3. Competition 4. Other regulatory issues

Other Residual Market Programs

1. Reinsurance Facility 2. State Fund

Advantage of Tort Liability System (4)

1. Remedy for victims of negligent drivers 2. Incentive for drivers to act responsibly (avoid lawsuits) 3. Victims are compensated 4. Costs are allocated to the responsible party

How Do Auto Insurance Plans Work?

All auto insurers are assigned their proportionate share of high risk drivers based on the total volume of auto insurance written in the state. (ex: Insurer that writes 10% in state - must cover 10% of high risk drivers).

Automobile Insurance Plans are also called...

Assigned Risk Plans; however, insurers see a negative connotation and prefer to not use that term. Plan designed for drivers who cannot obtain insurance in the voluntary market.

Educational Objective 3

Auto Insurance for High Risk Drivers

Educational Objective 1

Compensation of Auto Accident Victims

California Pay As Your Drive Program

Drivers pay auto insurance based on actual miles driven. Provides incentive to drive less and other benefits.

How do Safe Driver Insurance Plans Work in VMP

High risk drivers receive premium credits for not having accidents/violations within a time period or they pay high premiums.

No Fault Auto Insurance

Injured person *does not* have to establish fault or prove negligence and collects from own insurance. This law also restricts the filing of lawsuits against at-fault drivers. Also known as Personal Injury Protection

Damages Trigger

Losses > liability limits of at-fault driver. Applies to UIM coverage.

Educational Objective 2

No Fault Insurance Laws

Unfair Discrimination

Occurs when an insurer applies different standards or treatment to insureds w/ similar loss potential.

Primary Rating Factors (5)

These factors help determine the premium: 1. Use of Auto 2. Territory 3. Marital status 4. Gender 5. Age