INS 22 Assignment 2: Automobile Insurance and Society

under a no-fault system, an injured person does not need to establish fault and prove negligence in order to collect payment for damages. In addition, certain no-fault laws place some restrictions on an injured person's right to sue a negligent driver who causes an accident. In some states, when a claim is below a certain monetary threshold, the injured motorist collects for injuries under his or her own insurance policy

Briefly describe how no-fault automobile insurance operates

If a driver operates an auto in a negligent manner that results in bodily injury to another person or in damage to another's property, the operator can be held legally liable for damages incurred by the injured person. Under the tort liability system, injured auto accident victims must prove that another party was at fault before they can collect damages from that party

Briefly describe how the tort liability system compensates injured auto accident victims

no fault system- injured persons wouldn't need to establish fault or prove negligence to collect payment for damages, but they also would not be able to seek damages through the tort liability system modified no-fault system- injured persons would collect economic losses from their own insurers based on state-mandated PIP benefits, and they can sue at-fault drivers for any economic losses that exceed the no-fault coverage limits

Contrast a pure no-fault system with modified no-fault plans

UM coverage compensates an insured for bodily injury caused by an uninsured motorist, a hit-and-run driver, or a driver whose insurer is insolvent. UIM coverage, on the other hand, provides additional limits of protection to the victim of an auto accident when the negligent driver's insurance limits are insufficient to pay for the damages

Contrast uninsured motorists coverage (UM) with underinsured motorists coverage (UIM)

1. after an auto accident to provide proof of financial responsibility under these circumstances 2. after a conviction for certain serious offenses, such as drunk driving or reckless driving, or after losing a driver's license because of repeated violations 3. upon failure to pay a final judgment that results from an auto accident

Describe 3 circumstances under which a motorist is required to provide proof of financial responsibility to comply with financial responsibility laws

the motorists must provide proof of financial responsibility before an accident occurs. By requiring proof of financial responsibility prior to an accident, compulsory insurance laws go beyond financial responsibility laws by ensuring that accident victims are compensated for their losses

Describe an advantage of compulsory insurance laws, as compared to financial responsibility laws

1. an injured person can receive compensation from the fund after having obtained a judgment against a negligent driver and proving that the judgment cannot be collected 2. the maximum amount paid is generally limited to the state's minimum compulsory insurance requirement. In addition, most funds reduce the amount paid by any amount the injured person has collected from other collateral sources of recovery, such as workers compensation benefits or insurance 3. the negligent driver is not relieved of legal liability when the unsatisfied judgment fund compensates the insured person. The negligent driver's license is revoked until the driver reimburses the fund

Describe the common characteristics of unsatisfied judgment funds

1. most financial responsibility requirements become effective only after an accident, a conviction, or a judgment 2. financial responsibility laws do not guarantee payment to all accident victims. Persons injured by uninsured drivers, hit-and-run drivers, or drivers of stolen cars might not be compensated 3. injured persons might not be fully indemnified for their injuries even when injured by motorists who can prove financial responsibility. Most financial responsibility laws set minimum financial requirements, which may not fully compensate a victim

Describe the disadvantages of financial responsibility laws

insurers often divide auto insurance applicants into homogeneous classes such as preferred, standard, and non standard, that reflect different levels of exposure to loss. Applicants who have good driving records and rating factors present minimal loss exposure and are categorized as preferred. Conversely, applicants who have poor driving records or rating factors present greater loss exposure and are categorized as nonstandard and charged higher rates

Describe the homogeneous classes, or rating categories, that insurers often use to help match price to exposure

determined by state no-fault laws

Describe what determines the personal injury protection (PIP) coverage benefits that insurers provide

add-on plans allows injured drivers the option of collecting for economic losses through their own insurer, but it places no restrictions on their right to sue a negligent party for damages, a choice no fault plan enables the insured to choose whether to be covered on a modified no-fault basis at the time the policy is purchased or renewed. under a choice plan, insureds who choose the modified no-fault option have limitations on the right to sue for certain types of auto injuries. Insured who don't choose the modified no-fault option retain full rights to seek compensation from the negligent party, but they pay a higher premium than those insureds who choose the modified no-fault option

Explain how add-on plans differ from choice no-fault plans

is intended to decrease the number of uninsured drivers by making minimal liability coverage available at a reduced cost. Low-cost insurance programs are intended to provide some level of protection at a reduced cost to assist lower-income drivers in purchasing the insurance coverage required to comply with compulsory auto insurance laws

Explain how low-cost auto insurance addresses the problem of uninsured drivers

intense competition among insurers prompts regulators to monitor rates carefully to ensure adequacy and reasonableness. Regulators monitor rates primarily through insurers' rate filings

Explain the relationship between competition and regulatory monitoring of insurance rates and how that monitoring is accomplished

young drivers have less driving experience and ten to be involved in accidents more frequently than older drivers. Therefore, rates for younger drivers are often higher than hose for more experienced drivers

Explain these automobile insurance rating factors and why insurers use them: Age

this numerical ranking is based on the individual's financial history and is sometimes used to determine insurance rates. Research shows that insureds with low insurance scores submit more claims than insureds with high scores

Explain these automobile insurance rating factors and why insurers use them: Credit-based insurance score

young drivers who complete an approved driver education course often qualify for a premium discount. Drivers age 55 and older sometimes qualify for a premium discount for successfully completing defensive driver training courses. Driver training can help reduce the frequency and severity of auto losses

Explain these automobile insurance rating factors and why insurers use them: Driver education

a discount is often given to policyholders who have more than one auto under the same policy. Two or more autos owned by the same insured are usually not driven as often as a single auto. It is less costly for the insurer to cover additional autos under the same contract, so savings may be passed to the insured.

Explain these automobile insurance rating factors and why insurers use them: Multi-car policy

Territorial factors include the location where the auto is used and garaged, road conditions, state safety laws, and the extent of traffic regulation. These factors affect the frequency and/or severity of loss

Explain these automobile insurance rating factors and why insurers use them: Territory

No-fault laws were developed to avoid the costly and time-consuming process of determining legal liability for auto accidents under the tort liability system. By eliminating the need to prove fault, no-fault laws allow accident victims to receive benefits much sooner after an accident and, as a result, may allow for a quicker recovery from injuries

Explain why no-fault auto insurance laws were developed

insurers of high-risk drivers in the voluntary market accept their own applications, service their policies, pay their claims and expenses, and retain full responsibility for their own underwriting results. insurers of high-risk drivers in the residual market may accept applications and service policies, but responsibility for underwriting results is usually transferred to a pool or shared proportionally by all insurers in the market in one of several ways

How do the activities of insurers of high-risk drivers in the voluntary market differ from the activities in insurers in the residual market?

voluntary market programs and residual market programs

Identify 2 types of programs that provide automobile insurance for high-risk drivers

1. medical expenses 2. rehabilitation expenses 3. loss of earnings 4. expenses for essential services 5. funeral expenses 6. survivors' loss benefits

Identify 4 benefits required by no-fault laws

Tom can sue the at-fault party for his economic losses that exceed the $20,000 paid by his insurer- the additional $10,000. To recover any additional losses, he must first prove that the other driver was at fault for the accident

Tom lives in a modified no-fault state and carries the minimum PIP medical coverage limit of $20,000 set by the plan. Tom's state has a monetary threshold for noneconomic losses of $50,000. He sustains injuries in an auto accident and incurs $30,000 in economic losses, Tom also suffers $15,000 in noneconomic losses. -Can Tom sue the at-fault party for economic losses in this case? Explain

Because Tom's economic losses ($30,000) are below the $50,000 monetary threshold in his modified no-fault state, he can't sue the at-fault party for his noneconomic losses

Tom lives in a modified no-fault state and carries the minimum PIP medical coverage limit of $20,000 set by the plan. Tom's state has a monetary threshold for noneconomic losses of $50,000. He sustains injuries in an auto accident and incurs $30,000 in economic losses, Tom also suffers $15,000 in noneconomic losses. -Can Tom sue the at-fault party for noneconomic losses in this case? Explain

In servicing Mary's policy under the pool arrangement of reinsurance facility, XYZ handles Bill's liability claim

Tom lives in a modified no-fault state and carries the minimum PIP medical coverage limit of $20,000 set by the plan. Tom's state has a monetary threshold for noneconomic losses of $50,000. He sustains injuries in an auto accident and incurs $30,000 in economic losses, Tom also suffers $15,000 in noneconomic losses. -Does XYZ or the reinsurance facility handle Bill's liability claim?

Under modified no-fault laws, insureds can't collect for noneconomic losses through their PIP coverage, so Tom can't collect from his insurer for his noneconomic losses

Tom lives in a modified no-fault state and carries the minimum PIP medical coverage limit of $20,000 set by the plan. Tom's state has a monetary threshold for noneconomic losses of $50,000. He sustains injuries in an auto accident and incurs $30,000 in economic losses, Tom also suffers $15,000 in noneconomic losses. -What amount of noneconomic losses would Tom collect from his own insurer

Because they state has a reinsurance facility, all private insurers doing business in the state share any underwriting losses that occur as a result of Bill's claim

Tom lives in a modified no-fault state and carries the minimum PIP medical coverage limit of $20,000 set by the plan. Tom's state has a monetary threshold for noneconomic losses of $50,000. He sustains injuries in an auto accident and incurs $30,000 in economic losses, Tom also suffers $15,000 in noneconomic losses. -What organization(s) bears any underwriting losses that result from Bill's liability claim?

Tom would collect $20,000 in economic losses from his own insurer because his PIP medical coverage is limited to $20,000 and his economic losses ($30,000) exceed the limit

Tom lives in a modified no-fault state and carries the minimum PIP medical coverage limit of $20,000 set by the plan. Tom's state has a monetary threshold for noneconomic losses of $50,000. He sustains injuries in an auto accident and incurs $30,000 in economic losses, Tom also suffers $15,000 in noneconomic losses. -what amount of economic losses would Tom collect from his own insurer

all auto insurers doing business in the state are assigned their proportionate share of high-risk drivers based on the total volume of auto insurance written in the state

Under a state automobile insurance plan, how are the high-risk drivers apportioned to the auto insurers in that state

sets insurance rates and approves the policy forms to be used for high-risk drivers. The JUA designates servicing insurers that settle claims of high-risk drivers

What roles does a state joint underwriting association (JUA) serve with regard to rates, policy forms, and claim settlement for high-risk drivers

XYZ accepts Mary's application and services her policy

XYZ auto insurance sells insurance in a state that has a reinsurance facility for high-risk drivers. Mary is a high-risk driver who has obtained insurance from XYZ. XYZ in turn assigned Mary to the reinsurance facility. Mary subsequently had an auto accident and is responsible for the damage to Bill's auto and for Bill's injuries -Does XYZ or the reinsurance facility accept Mary's application and service

if a large number of applicants of the predominant ethnic origin had poor driving experience and/or numerous claims, a 70% discount on their rate would be unlikely to provide enough profit for the insurer to adequately pay its claims and expenses

XYZ insurance has its home office in a state with a population that consists predominantly of people of a particular ethnic origin. XYZ wanted to encourage state residents to buy insurance policies, so it filed rates with the state insurance regulators that extended a flat 70% discount to all applicants of the predominant ethnic origin, after considering other rating factors. Explain why the state regulators might not approve these rates based on each of the following rating objectives: -Rates must be adequate to pay all claims and expenses

a 70% discount on rates based on the applicant's ethnic origin is unfairly discriminatory to all other applicants because an individual's ethnicity doesn't affect loss potential

XYZ insurance has its home office in a state with a population that consists predominantly of people of a particular ethnic origin. XYZ wanted to encourage state residents to buy insurance policies, so it filed rates with the state insurance regulators that extended a flat 70% discount to all applicants of the predominant ethnic origin, after considering other rating factors. Explain why the state regulators might not approve these rates based on each of the following rating objectives: -rates must not be unfairly discriminatory

unsatisfied judgment fund

a fund designed to provided a source of recovery for victims of motor vehicle accidents when an at-fault motorist is unable to pay any judgment

Reinsurance facility

a state-wide reinsurance pool to which insurers can assign premiums and losses for high-risk drivers; original insurers service the policies, but all insurers in the pool share the losses and expenses of the facility in proportion to the total auto insurance they write in that state

underinsured motorists coverage (UIM)

coverage that applies when a negligent driver has liability insurance at the time of the accident but has limits lower than those of the injured person's coverage

Personal injury protection (PIP) Coverage

coverage that pays benefits, regardless of fault, for medical expense, income loss, and other benefits, resulting from bodily injury to occupants of a covered auto

uninsured motorists coverage (UM)

coverage that provides a source of recovery for occupants of a covered auto or for qualifying pedestrians who are injured in an accident caused by an at-fault motorist who doesn't have the state minimum liability insurance or by hit-and-run driver

Monetary threshold (dollar threshold)

in a no-fault system, a dollar limit in total medical expenses an injured victim must exceed before he or she is permitted to sue the other party

Choice no-fault plan

in a no-fault system, a plan that gives the insured the option, at the time an auto insurance policy is purchased or renewed, of choosing whether to be covered on a no-fault basis

Add-on plan

in a no-fault system, a plan that provides certain personal injury protection (PIP) type benefits such as medical payments and disability coverages to injured victims, without regard to fault

Verbal threshold

in a no-fault system, the designated criteria that are verbally "set forth in the statute that limit the right to sue"

no-fault automobile insurance

insurance that covers automobile accident victims on a first-party basis, allowing them to collect damages from their own insurers regardless of who was at fault

financial responsibility law

law enacted to ensure that motorists have the financial ability to pay for any property damage or bodily injury they might cause as a result of driving or owning an auto

compulsory auto insurance law

law that requires the owners or operators of automobiles to carry automobile liability insurance at least equal to certain minimum limits before the vehicle can be licenses or registered

Joint underwriting association (JUA)

organization that designates servicing insurers to handle high-risk auto insurance business; all auto insurers in the state are assessed a proportionate share of the losses and expenses based on their percentage of the voluntary auto insurance premiums written in the state

Automobile insurance plan

plan for insuring high-risk drivers in which all auto insurers doing business in the state are assigned their proportionate share of such drivers based on the total volume of auto insurance written in the state

Safe drive insurance plan (SDIP)

plan that allows for lower basic premiums for accident-free driving records and a surcharge for accidents

No-fault laws

state statutes that require motorists to purchase (or requires insurers to make available) insurance that provides minimum first-party benefits to injured persons regardless of fault

first party

the insured in an insurance contract

Subrogation

the process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss

Residual market

the term referring collectively to insurers and other organizations that make insurance available through a shared risk mechanism to those who can't obtain coverage in the admitted market