Separate Classification for SUVs Can Boost Auto Insurers' Profitability
6 January 2000
Separate Classification for Sport-Utility Vehicles Can Boost Auto Insurers' Profitability, Study Says
OLDWICK, N.J.--Jan. 5, 2000--Automobile insurance writers can improve their profitability by taking vehicle class into account when setting their liability rates, according to an article in the January Best's Review.The article -- written by Michael C. Dubin, a consulting actuary with Milliman & Robertson -- begins by looking at the impact sport-utility vehicles have had on property damage claims. According to the Highway Loss Data Institute, SUVs generate 72% more property damage liability losses than other vehicles. With approximately 3 million SUVs on the road and more being produced, this is an important issue for auto insurers.
"But it is difficult for an insurance company to separate that experience from other parts of the ratemaking process," the article says. "Some vehicles may cause more damage, the argument goes, but what about the other factors, such as driver characteristics, the number of accidents or the damage to the insured vehicle itself?"
Because it is difficult to quantify the interaction of these factors in a practical way, many companies base rating-plan decisions on regulatory constraints, historical acceptability, simplicity and judgment.
"They have no clear and objective criteria," the article says, "to help them decide what rating variables to use."
The article goes on to say, "If it can be shown that sport-utility vehicles have risk characteristics different from other vehicles, then a company would be well served by using a plan that assigns sport-utility vehicles to different classes than other vehicles."
A Milliman & Robertson study used several scenarios to test the effect of such a plan in a hypothetical market. According to the article, the study found that companies that rated SUVs separately were "protected from adverse selection, had fair rates for all vehicles and earned target profit over the three scenarios. The other companies were subject to adverse selection, did not have fair rates for all vehicles and suffered an unexpected underwriting loss."
The full article, titled "Class Distinctions," can be read on the Internet at www.bestreview.com.
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.
