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Factors That Affect Auto Insurance: From A Company Standpoint

The underwriting process helps determine the appropriate premium based on the level of risk. However, auto insurance premiums are also affected by factors that are not directly controlled by companies. These include frequency and severity of crashes, auto repair costs, medical and hospital costs, lawsuits and court judgments, insurance fraud, vehicle type and deductibles.

The Insurance Information Institute estimates that insurer prohibition in its use of generic parts to repair vehicles could add $4–5 billion annually to the cost of auto insurance.

Jury Verdict Research reports that the average jury award in auto liability cases rose from $187,000 in 1994 to $323,000 in 2001—an increase of 73%.

Crash frequency and severity

The combination of accident frequency and severity affects the portion of your premium that covers losses. Crash frequency is how many and how often crashes occur. The higher the frequency, the more insurers pay in claims.

Between 1980–2000, there was a 16% drop in crash frequency, as measured by property damage liability (PD) claims. In 1998, 4.94 auto PD claims were filed per 100 insured vehicles, declining to 4.13 in 2000. However, the number of bodily injury (BI) claims during the same period rose 26%, according to a 2002 Insurance Research Council study. 1.11 BI claims per 100 insured cars were filed in 2000 compared to .88 in 1980. In 1998, Ohio’s claims per 100 insured cars was 1.12 BI claims and 3.97 PD claims. In 2000, Ohio’s BI claims were 1.07 and 3.95 PD claims.

Accident severity is reflected in the amount paid per accident claim. PD claim costs under auto liability coverage averaged $2,226 in 1998, rising to $2,564 in 2002. Average BI claim payments under auto liability coverage have increased at a slower pace, partly due to safer cars. The average BI claim in 1998 was $9,556 and $10,138 in 2002.

Recent claim loss changes

Until recently, vehicle make and model were not considered when determining liability premiums. Advances in computerization allow insurers to analyze claims data by make and model.

National Highway Traffic Safety Administration (NHTSA) statistics show that although the US accident-fatality rate remained unchanged in 2002 (1.51 for every 100 million vehicle miles traveled), the 42,850 fatalities reported were the highest since 1990. NHSTA reports that rollover crash fatalities involving SUVs accounted for 53% of the increase from 2001 figures.

Insurers continue to analyze liability premiums on some large SUVs, pickups and vans. The injury and property damage that bigger vehicles can inflict, especially when the weights of colliding vehicles can vary by a ton or more, can be significant.

Insurance scoring

Insurance scores help insurers differentiate between lower and higher insurance risks and thus charge a premium equal to the risk they are assuming. Actuarial studies show that how a person manages his or her financial affairs, which is what an insurance score indicates, is a good predictor of insurance claims. Statistically, people who have a poor insurance score are more likely to file a claim.

Such factors as income, marital status and address are not used in scoring. The application of an insurance score varies by company as do the models used in determining a score. Insurance scoring benefits the majority of policyholders by lowering premiums.

Insurance score studies

Confirming the insurance industry’s experience with insurance scores, several actuarial studies have shown that they are a major predictor of insurance risk. One recent study by EPIC Actuaries was conducted for insurance industry trade groups. It found a correlation between insurance scores and claim frequency. It also found that while overlapping to some degree with other underwriting factors, overall insurance scores significantly increase the accuracy of the risk assessment process and are among the three most important risk characteristics for each of the six major automobile coverages. For example, for property damage liability coverage, those with the worst insurance scores had expected losses of 33% above average and those with the best 19% below average. Some 2.7 million records were studied.

NOTE: View the EPIC study online at:

An independent study commissioned by the Texas state legislature found a strong correlation between credit history and the filing of an auto insurance claim—both the frequency and severity of claims. The Bureau of Business Research at the University of Texas conducted the study using 153,326 policies from five insurers doing business in Texas. Since the policies were from the first quarter of 1998, researchers could track the actual losses from claims associated with the policies. The database of policyholders was divided into ten equal-sized groups according to credit scores. When these were matched up with claim data, researchers found that those with the worst credit scores had claim losses that averaged $918—53% higher than the expected average and those with the best credit score had losses that averaged $558—25% less than the average.

NOTE: View the Texas study online at:

Ohio’s credit score rule

In 2003 the Ohio Department of Insurance (ODI) issued a rule regarding the use of credit history and credit scores. It applies to all policies issued or renewed on or after September 9, 2003.

The rule provides consumer protection as it pertains to insurer use of credit history and credit score information. It also establishes industry guidelines for use of such information pertaining to underwriting and rating of auto and homeowners insurance.

Key provisions include:

  • A credit history or score cannot be used as the sole factor in underwriting, premium determination or adverse action as it pertains to the consumer.
  • An insurer is prohibited from considering the following: Credit inquiries not initiated by the consumer, those related to insurance, portions of the credit history identified as being under dispute and medical collection accounts.
  • Insurers are required to notify consumers either prior to or at the time of insurance application that credit history or related information may be obtained in order to establish a firm offer of insurance. This section of the rule also protects consumers by establishing guidelines in situations where the use of credit information adversely affects the underwriting process or premium. In cases of adverse action as a result of credit history or a credit score, the insurer must identify and describe the nature of the adverse action in writing within 30 days.

The ODI rule goes beyond the requirements established under the Fair Credit Reporting Act.

NOTE: View the ODI Credit Score Rule online at

Ohio’s Supreme Court rulings

State law requires that auto insurance premiums be adequate to cover anticipated losses, many of which insurers are able to calculate; some however cannot. At times, the unpredictable nature of Ohio court rulings has affected what we pay for insurance and the terms and conditions of the policy.

According to the 2003 auto insurance study of the National Association of Insurance Commissioners, Ohio’s average liability premium rose about 2.2% between 1997–2001 while the US average liability premium decreased nearly 6.2%.

Ohio Supreme Court rulings have expanded coverage on occasion. One such case in late December 2000, Linko v. Indemnity Insurance Company of North America, adversely affected the cost of uninsured/underinsured motorists coverage. With the passage of SB 97 (effective October 31, 2001), this court action was remedied.

Competition factor

The most important factor affecting rates from a company standpoint is competition. Ohio’s environment facilitates competition among insurers, helping to keep premiums well below the US average. According to A.M. Best data for 2002, only one state—Illinois—has more auto insurance providers than Ohio. In 2002, there were 289 companies licensed to write auto insurance in the Buckeye state.

The incidence of drivers being ticketed for extreme speeding (over 90 mph) increased from 2% of tickets issued in 1991 to 10% in 2002.
(USA Today, 2/23/04)