A few things to add:
+ Premiums are charged for future accidents, not past accidents.
+ Safe drivers do have accidents sometimes.
+ With the expertise of Robert Hunter, a new insurance company could be started to write the business of the overcharged people he identifies. It’s been done before and is more effective than complaining. Just ask a company like USAA.
Bob Hunter’s career relies upon finding “discrimination” by insurers. Hence, he finds such “discrimination” under every rock. He’s not actually stupid enough to believe what he’s saying.
If it was possible to profitably serve all groups using only driving-related variables and much lower rates, someone would be doing it. There are an average of around 200 auto insurers competing in each state, with a few exceptions. Don’t you think at least one of them would be going after all these “overpriced” customers?
Robert Hunter was Commissioner of Insurance for Texas for a short while and we were glad to see him go since he was a big consumer advocate and could care less about the industry he was supposed to monitor.
Two more thoughts.
– maybe the biggest factor is the lapse in continuous coverage and not occupation/education.
– how do large premium differences between carriers equate to an uncompetitive market? Drivers should get as many quotes as they can and choose the policy & price that’s best for them.
We, as agents scratch our head all the time on some of the quotes that come out of the system. Carriers have built in so many variables into their pricing, it is impossible to identify the factors they are using. They have it down to a science, even by zip code. I had a good customer move only 2 miles to a different zip code and they got an increase in premium because the zip code he moved to had a higher incidence of loss with the company. It had nothing to do with the clean customer, just the company rating system.
Youngin, how would you like to be charged more for your Auto coverge if you moved 2 miles in your own town? It makes sense if a customer moved from a smaller city to a larger one with many more drivers on the road. We used to call that Territory rating. They should also be charged less if they move from a large city to a smaller one because of fewer autos on the road. If a person has a clean record and only moved a little ways in the same town, they shouldn’t have to pay a higher rate, Period!
Agent,
You should understand that when you pay premiums, you are paying for coverage into the future and that companies are trying to predict what that policy will cost them. If you move from an area with a low claims history to one with a higher claims history, that increases the likelihood your client will file a claim. It does not mean it will happen.
There is no perfect system, but the more variables used, the more accurate the premium charged for the risk.
I used to work in product management for a carrier and I learned a lot from the actuaries. They do not want agents knowing all of the factors they use and how they impact the rate because there are plenty of unscrupulous agents who will input information that will give them the best rate, whether or not that information is accurate.
And if that customer moves next door to a different customer who also has a clean record, they should be charged different rates? Is that your suggestion?
Rating territory lines have to be drawn somewhere, whether by state, city/town, zip code or other. So it is possible that next door neighbors, all else being equal, could pay different rates.
January 29, 2013 at 10:10 am
youngin' says:
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Actually I was addressing Agent. I agree with you. Agent seems to want it both ways, I can’t tell if he/she wants more or less granularity in territory rating, or maybe just a rating free-for-all where everyone in the state pays the same rate unless they have claims.
January 29, 2013 at 10:36 am
Ron says:
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I thought you were addressing Agent, but wasn’t sure. Agent would still complain if the state line was between the 2 neighbors and they had to pay different rates.
January 30, 2013 at 9:52 am
Agent says:
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Ron, you and youngin are both making this discussion far too complicated. I could really care less what the neighbor next door to my insured pays for his coverage. He has his own score, record, different autos etc which stand on its own. My customer has his score, record and autos and the company has had him for 5 years with a perfect record. Just because he moved two miles down the road should not signal a premium increase to the carrier. By the way, he asked me to move his coverage for renewal due to this issue and we accommodated him. The new carrier had a different approach and we got the coverage for less with equal coverage.
January 30, 2013 at 1:47 pm
youngin' says:
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By “new approach” do you mean they don’t use territory rating or that their quote was lower? If the former, please let us know who this carrier is that has managed to stay profitable despite adverse selection. If the latter, then you’re just providing another example of “customers who switched saved an average of $XXX” nonsense.
January 30, 2013 at 2:41 pm
Ron says:
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Agent,
My point was that any way a carrier sets their territories (state, region, town/city, zip code) your client may only have to move next door to see a rate increase, let alone 2 miles. It is your job to either explain how rates are set or move them to a lower priced carrier. You chose the latter.
Agents always preach that their value comes from providing service, education and advice. It sounds like you earned your commission with this one.
January 29, 2013 at 10:33 am
AutoPM says:
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I can tell you that many of us who work in Auto Product Management today are concerned with issues around territory rating. A big problem is that for most companies, the territory is based on where you live vs where you are actually driving the vehicle. This is one of the reasons that telematics is interesting – it may be possible to do away with the antiquated territory methods in place today by rating a customer on where they drive and not where they live.
CA Prop 103 is simple.
REM:
Record.
Experience.
Mileage.
Then other factors like zip code, age, sex, marital status, type of car you drive, etc.
19 factors in all.
Since 1988.
And we all know California is the model for the rest of the country for rates on everything. I wonder how many of those illegals out there are running around with no insurance, no license and running over people with insurance. Will the U/M loss be held against the safe driver?
You bring up an interesting point. In CA, Product Managers like me have our creativity stifled, but most companies make money in the state. So how valuable is my creativity? The answer to the strong profitability in CA lies in that companies will never take rates down in this state unless they are forced to do so, so it is a state with solid base rate adequacy. Another way to say it is that the very best drivers in CA are subsidizing the worst drivers more so than in other states where companies can be creative in identifying drivers who deserve the lowest rates.
This is not a scientific report; and all things are NOT equal between the two profiles that they were using for their quotes. The reason for the rate difference is because of the lack of continuous coverage. Having a lapse in coverage of over 30 days is worse than an at fault accident. Give the lady with the Masters degree a lapse and coverage too and then come back to us.
Nonetheless, I do agree that there is no empirical evidence to support the discrimination for education and occupation. As a matter of fact, some of the higher educated are also some of the worse drivers I have seen.
You are absolutely correct JR. Some of my well to do educated insureds and their well educated kids have presented lots of problems with accidents and violations. They often end up in Progressive because the other standards don’t want them with their records. They seem to feel entitled and they have expensive cars and accidents cost a lot.
Anecdotal evidence does not equal empirical data. Occupation and Education are two or many variables considered. If your rich, educated neighbor has a bad driving record, he will be surcharged for that – and sometimes more steeply than the less educated.
If there was no empirical evidence to support any rating variable, then the states would not allow the companies to use them. Do you really believe that the state insurance departments let companies do whatever they want without any evidence? Have you ever filed for a rate change with a state insurance department? They request a significant amount of supporting evidence, even for a rate decrease, prior to approval.
There is a reason that these are so widely used, there is plenty of empirical data and they work.
I am an Independent Agent in Kentucky, which unfortunately has some of the highest insurance rates in the country. First of all, with a lapse in coverage, you will pay higher premiums. I won’t quote people who do not have current auto coverage because history has shown me that people who drive without insurance are not loyal and do not value the service I provide. Also, data has shown that those who want state minimum liability limits are higher risk. Some carriers charge more for minimum coverage than higher limits. Also, if the receptionist was renting, she would need a renters policy. This would save her up to 25% with some carriers and would also protect her personal property.
The industry’s embrace of credit score underwriting is so wrong in my humble opinion. The big 3 insurance companies built the largest insurance delivery system in the free world without such factors. Now they hire consultants to tell them how to sell insurance. We did it profitably and fairly. OF course we were using microfilm for our records. Perhaps this is the wrong way for technology to have taken us.
If credit scoring is so wrong, why do states allow it and insurance companies profit from its use?
The decision to use any rating factor is quite simple. Just ask 2 questions:
1. Does it improve profitability?
2. Is there evidence to support its use to the state?
The process of answering those questions is not so simple.
Your responses sound just like what my underwriters tell me. There is no more underwriting in personal lines, just a list of what they don’t write anyway.
Please don’t try to dispute the infallibility of the insurance companies to us. The insurance has two objects, to make a profit and to provide an important service to the general public. Oftentimes, one takes precedence over the other.
I don’t dispute the benefit of insurance scoring as a predictive model. However, it is not perfect. A lot of times a client will have a bad score, then they come back 3 months later and the score has improved dramatically for any number of reasons. That alone disputes the credibility of insurance scoring. Are they a better driver now?
With respect to education and occupation, I don’t see any correlation for education and I have never seen any independent research supporting it. Occupation has a clear correlation and it isn’t intuitive. For example, we all know priests and ministers are high risk and realtors have high accident frequencies b/c they are always on the road.
What this ultimately comes down to is that the insurance carriers want to correct premium dollars from multiple cars, umbrella, home insurance, and all the other fancy products they come up with. With that money, the carriers make money on “float” through their investments.
“What this ultimately comes down to is that the insurance carriers want to correct premium dollars from multiple cars, umbrella, home insurance, and all the other fancy products they come up with. With that money, the carriers make money on “float” through their investments.”
Yes, that is the business model, but insurance prices reflect the anticipated investment income, just like they do in life insurance.
That’s absolutely correct. The states limit the profit & contingencies provision, based on the insurer’s investment income. The better the investment income, the less profit they are allowed to incorporate into the rates.
January 29, 2013 at 11:29 am
Ron says:
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When was I lying? I am just trying to help those who may not have a thorough understanding about ratemaking learn something about the process.
The reasons there is no underwriting in personal lines is because of the volume of policies, homogeneity, and lower profit margins that cause companies to focus on lowering expenses in order to compete.
Insurance, like any other for profit business has only 1 object, maximize profits. The fact that their products provide a service to the general public is a by-product.
No rating variable is perfect. For every person with a low insurance score who is a good risk you can find a 17-21 year old driver who is also a good risk. The problem is in how to isolate them from the rest of their group. That is why insurance companies use so many rating variables.
We need to stop thinking in terms of exceptions. How often to people improve their credit scores dramatically in 3 months? If that hapens, re-quote him/her with the new score. It is not feasible to make rates for every possible scenario.
I do not know any companies that use education as a variable. I am sure there are some, but I am not a fan. However, if there are companies using it, they would have had to provide support to the states in which they write the insurance. Meaning that someone saw a correlation and was able to prove its validity.
I never meant to infer that you were a liar. That quote was just in reference to the insurance companies referring to their statistical models as proof for rating. They can bend the data to suit their needs when filing for rating.
Believe me that I do understand all of what you are saying. With respect to the rating models out there. What needs to be clarified her is what is being posited by the CFA research and the insurance companies role is in providing a service to the general public.
CFA may be wrong in the way the went about in trying to proof their conclusion, we can all agree that their research was NOT scientific. But they are still right, insurance companies are discriminating one group over the other. The reason is because the carriers are no longer underwriting the risks like they used to. They shifted away from rating for driving experience and are now looking to collect premium on volume of cars and products. The consequence of this is that certain demographics may be inadvertently impacted by this.
This was all pioneered by GEICO who simply wants to collect a lot of premium as fast as possible so that Berkshire Hathaway can make their profit on float. The reason for GEICO focusing on auto is because there are an immense amount of data out their which allows them to hedge their losses quickly and do not need to rely on the volatility of the home insurance market thanks to climate changes and the weakened real estate market (that came from Warren Buffet himself). A lot of the carriers out there can no longer rely on home insurance premium to carry their company and need to find different types of innovation to try and stay profitable and compete with GEICO.
January 29, 2013 at 12:34 pm
Ron says:
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From experience let me tell you that states allow for very little bending of data in rate filings. They require very large samples and there must be a strong correlation in order to gain approval.
I do not have any problem with CFA or any other consumer advocacy group since I believe they do provide a service. However, I have a huge problem with either side of the argument putting forth insufficient or inaccurate information to support their case.
Yes, insurance companies do discriminate and there is nothing inherently wrong with that as long as it is fair discrimination. Every state has limits to what can be discriminated against.
The shifting from driving experience to other factors was a result of inconsistent loss ratios. Actuaries determined that there were other factors that contributed to loss experience besides just experience. In addition, increased granularity improved the accuracy of rates and helped stabilize loss ratios.
January 29, 2013 at 1:24 pm
JR Insurance Guy says:
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The insurance company’s backs are against the wall because the current business model of auto/home is not profitable like it used to be because of all the reasons I previously mentioned.
If we were to stick to the old model, a lot of companies would be running the risk of being insolvent between the generous PIP coverage on auto and the climate change on home insurance.
Non-Profits like CFA and some consumers don’t understand that we are a “for profit” business and that we won’t be able to remain profitable under the old model. But don’t tell that to the insurance commissioners either, because their interests are to serve the general public.
My gripe is with the fact that we, as agents/brokers, are on the front line and have to walk the fine line of protecting our carrier’s profits and to provide a meaningful service to ALL our clients. When you have to tell a client that their rate is high because they have bad credit or they do not have a college degree, even though they do not have points or accidents, it would only serve to infuriate them; especially when they know a friend that does have a college degree or good credit, yet they drive like crash dummies but still pay a lower premium. I can give the explanation of the shift in rating model from the carriers, but that still does not satisfy the customer who did everything right but is still getting rated. It is only natural for the customer to assume that “if I am a good driver, never had an accident, and had continuous coverage, I should pay a lower premium.”
January 29, 2013 at 1:48 pm
Ron says:
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I understand your position. I used to work for an agent. It is difficult to advise people how insurance rating works, but educating the client is part of the agent’s job.
Very few people enjoy all aspects of their job.
I am sure they understand insurance is for profit, that is the part of our industry on which they prey. People think insurance should not be as focused on profits as other industries. That may be due to the industry’s marketing of itself with the policyholder being in the good hands of a good neighbor who is on their side and saving you lots of money.
January 29, 2013 at 9:43 am
Agent says:
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Apparently, the consultants advising some carriers aren’t doing a very good job at it. Carriers that continually take rate are having poor experience because their selection process is flawed. Some bought into the theory they could write a whole spectrum of drivers and just put them in different rating tiers based on score or violations/accidents. The safe drivers with no claims end up paying a higher premium because part of the book continually have claims. Progressive will take anything for a price and their model works for them.
Deciding what is “wrong” is quite challenging. When I entered the business in the mid 1980s, rating plans were simple and underwriting rules were complex. For example, I was taught subjective rules like never write someone in a preferred program who was divorced within the last year or never write someone who was a “contractor.” Those old rules have been replaced by the mindset of accepting a broader spectrum of risk but do so by segmenting the pricing by trying to use variables that are as objective as possible. I prefer what we do today vs the old subjectivity I was taught back in the day as the rating variables are developed based on empirical data.
PM, Back in the day, we had underwriters who could evaluate risk and either accept it or decline it. Now, the industry is in the cost savings mode, so they have geek actuaries making a computer program that puts risks into boxes based on dozens of variables. There is practically no underwriting at all anymore. It is so complicated that few understand it. Now, they have early quote discounts and one can get a lower premium if the risk is quoted a week before the effective date. If the client waits until exp date, they pay a higher premium. I get frustrated that I can’t live with my original quote on some accounts. There is little stability out there on rating.
January 29, 2013 at 2:12 pm
ned says:
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Does the aroma of the premium cover the stink of the risk?
If the aroma is sufficient to cover to the stink and provide some extra scent, yes. I would insure a burning building, effective the day before, if I can get the right premium.
January 29, 2013 at 12:36 pm
jw says:
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Question for the agents out there… Are you selling the latest tool that records where the car is actually driving? AutoPM referenced it earlier.
I just attended a presentation from one of the data companies, now I want to know how it’s working. Will this “fix” rating? I really just curious, not researching a disertation.
So Ron, where would you place the burning building coverage the day before? You could write a $100,000 building for a premium of $95,000 with a $10,000 deductible and come out ok. If it turned out to be arson, you may do even better.
Carriers are always preaching bundling to get the best pricing. They will write unsupported Auto, but don’t want unsupported HO. When we try to bundle, often the Auto is the line that causes the problems on the total cost. It is really hard to find that ideal customer that is perfect on both. When we do, we are genuinely surprised. Add that in with a lot of carriers taking rate continuously and you have a problem coming up with something a prospect likes.
The CFA ‘study’ is fatally flawed because Bob Hunter (an actuary who should know better) did not compare variables equally. His two mock examples needed to be identical except for one variable like income or education. Then he would have a point. But because the two examples have more than one variable (notably the lack of continuous coverage) then you can make any extrapolations. The worse part is Bob Hunter KNOWS this as a former actuary.
In fact if you at the tables and do the math, which most of the mainstream reporters won’t do, you’ll see that the higher income, higher educated woman got the better rate only 31 times. The lower income woman got a better rate 20 times. In several other times thee was no difference. So how does that equal an unfair discrimination? It doesn’t.
It’s proof that this was all concocted to get publicity for the CFA and sadly most press outlets won’t spend the intellectual capital to look behind the numbers and see the study for the fraud it is.
The CFA’s study is fatally flawed because it allowed for more variables between the two woman than just education and income. Notably the lower income woman was not insured for 45 days which is a high risk factor. The study should have had that fact be the same for both. In fact the data sets for both women should have been EXACTLY the same except for one factor like income or education, then you could make the claim the CFA is making. And, sadly, Bob Hunter is a former actuary and KNOWS this. So clearly this was just an attempt to get publicity using flawed data to try to attack the insurance industry.
In fact if you look into the survey they used (and most reporters won’t spend the intellectual capital to do so), you’ll see that in 30 cases the executive got a better rate. But not always. In a full 20 cases the receptionist got a better deal. So how do you say that is improperly discriminatory?
What is good about the CFA’s press release is it calls attention to the fact that it is a very wise consumer tip to ALWAYS shop your insurance coverage at each renewal because the market is very competitive.
A 2003 study by EPIC Actuaries, LLC of 2.3 million insured autos and their drivers showed that drivers’ credit scores were the 3rd most important factor in predicting auto claims, even more important than drivers’ accident records. So, yes, the CFA study is flawed. The sample size is way too low, and the methodoly ignores many important variables. Hunter’s conclusion is laughable.
Gregg, Hunter is a joke. Ask any company rep that dealt with him in Texas for the few short years he was there and they will tell you the same thing. He is just a consumer advocate 100%. They will always say that any premium charged is too much and ignore all the loss data and business environment.
A few things to add:
+ Premiums are charged for future accidents, not past accidents.
+ Safe drivers do have accidents sometimes.
+ With the expertise of Robert Hunter, a new insurance company could be started to write the business of the overcharged people he identifies. It’s been done before and is more effective than complaining. Just ask a company like USAA.
Bob Hunter’s career relies upon finding “discrimination” by insurers. Hence, he finds such “discrimination” under every rock. He’s not actually stupid enough to believe what he’s saying.
If it was possible to profitably serve all groups using only driving-related variables and much lower rates, someone would be doing it. There are an average of around 200 auto insurers competing in each state, with a few exceptions. Don’t you think at least one of them would be going after all these “overpriced” customers?
Robert Hunter was Commissioner of Insurance for Texas for a short while and we were glad to see him go since he was a big consumer advocate and could care less about the industry he was supposed to monitor.
Two more thoughts.
– maybe the biggest factor is the lapse in continuous coverage and not occupation/education.
– how do large premium differences between carriers equate to an uncompetitive market? Drivers should get as many quotes as they can and choose the policy & price that’s best for them.
We, as agents scratch our head all the time on some of the quotes that come out of the system. Carriers have built in so many variables into their pricing, it is impossible to identify the factors they are using. They have it down to a science, even by zip code. I had a good customer move only 2 miles to a different zip code and they got an increase in premium because the zip code he moved to had a higher incidence of loss with the company. It had nothing to do with the clean customer, just the company rating system.
Tell me, Agent . . . Do you think we should start charging policyholders based on where they USED to live?
Youngin, how would you like to be charged more for your Auto coverge if you moved 2 miles in your own town? It makes sense if a customer moved from a smaller city to a larger one with many more drivers on the road. We used to call that Territory rating. They should also be charged less if they move from a large city to a smaller one because of fewer autos on the road. If a person has a clean record and only moved a little ways in the same town, they shouldn’t have to pay a higher rate, Period!
Agent,
You should understand that when you pay premiums, you are paying for coverage into the future and that companies are trying to predict what that policy will cost them. If you move from an area with a low claims history to one with a higher claims history, that increases the likelihood your client will file a claim. It does not mean it will happen.
There is no perfect system, but the more variables used, the more accurate the premium charged for the risk.
I used to work in product management for a carrier and I learned a lot from the actuaries. They do not want agents knowing all of the factors they use and how they impact the rate because there are plenty of unscrupulous agents who will input information that will give them the best rate, whether or not that information is accurate.
And if that customer moves next door to a different customer who also has a clean record, they should be charged different rates? Is that your suggestion?
Rating territory lines have to be drawn somewhere, whether by state, city/town, zip code or other. So it is possible that next door neighbors, all else being equal, could pay different rates.
Actually I was addressing Agent. I agree with you. Agent seems to want it both ways, I can’t tell if he/she wants more or less granularity in territory rating, or maybe just a rating free-for-all where everyone in the state pays the same rate unless they have claims.
I thought you were addressing Agent, but wasn’t sure. Agent would still complain if the state line was between the 2 neighbors and they had to pay different rates.
Ron, you and youngin are both making this discussion far too complicated. I could really care less what the neighbor next door to my insured pays for his coverage. He has his own score, record, different autos etc which stand on its own. My customer has his score, record and autos and the company has had him for 5 years with a perfect record. Just because he moved two miles down the road should not signal a premium increase to the carrier. By the way, he asked me to move his coverage for renewal due to this issue and we accommodated him. The new carrier had a different approach and we got the coverage for less with equal coverage.
By “new approach” do you mean they don’t use territory rating or that their quote was lower? If the former, please let us know who this carrier is that has managed to stay profitable despite adverse selection. If the latter, then you’re just providing another example of “customers who switched saved an average of $XXX” nonsense.
Agent,
My point was that any way a carrier sets their territories (state, region, town/city, zip code) your client may only have to move next door to see a rate increase, let alone 2 miles. It is your job to either explain how rates are set or move them to a lower priced carrier. You chose the latter.
Agents always preach that their value comes from providing service, education and advice. It sounds like you earned your commission with this one.
I can tell you that many of us who work in Auto Product Management today are concerned with issues around territory rating. A big problem is that for most companies, the territory is based on where you live vs where you are actually driving the vehicle. This is one of the reasons that telematics is interesting – it may be possible to do away with the antiquated territory methods in place today by rating a customer on where they drive and not where they live.
“But the consumer group said these two women differed in several important respects: …has been without insurance coverage 45 days…”
That’s why she’s being charged more. Pretty simple, that’s typically a big ding in rates!
CA Prop 103 is simple.
REM:
Record.
Experience.
Mileage.
Then other factors like zip code, age, sex, marital status, type of car you drive, etc.
19 factors in all.
Since 1988.
And we all know California is the model for the rest of the country for rates on everything. I wonder how many of those illegals out there are running around with no insurance, no license and running over people with insurance. Will the U/M loss be held against the safe driver?
You bring up an interesting point. In CA, Product Managers like me have our creativity stifled, but most companies make money in the state. So how valuable is my creativity? The answer to the strong profitability in CA lies in that companies will never take rates down in this state unless they are forced to do so, so it is a state with solid base rate adequacy. Another way to say it is that the very best drivers in CA are subsidizing the worst drivers more so than in other states where companies can be creative in identifying drivers who deserve the lowest rates.
This is not a scientific report; and all things are NOT equal between the two profiles that they were using for their quotes. The reason for the rate difference is because of the lack of continuous coverage. Having a lapse in coverage of over 30 days is worse than an at fault accident. Give the lady with the Masters degree a lapse and coverage too and then come back to us.
Nonetheless, I do agree that there is no empirical evidence to support the discrimination for education and occupation. As a matter of fact, some of the higher educated are also some of the worse drivers I have seen.
You are absolutely correct JR. Some of my well to do educated insureds and their well educated kids have presented lots of problems with accidents and violations. They often end up in Progressive because the other standards don’t want them with their records. They seem to feel entitled and they have expensive cars and accidents cost a lot.
Anecdotal evidence does not equal empirical data. Occupation and Education are two or many variables considered. If your rich, educated neighbor has a bad driving record, he will be surcharged for that – and sometimes more steeply than the less educated.
If there was no empirical evidence to support any rating variable, then the states would not allow the companies to use them. Do you really believe that the state insurance departments let companies do whatever they want without any evidence? Have you ever filed for a rate change with a state insurance department? They request a significant amount of supporting evidence, even for a rate decrease, prior to approval.
There is a reason that these are so widely used, there is plenty of empirical data and they work.
I am an Independent Agent in Kentucky, which unfortunately has some of the highest insurance rates in the country. First of all, with a lapse in coverage, you will pay higher premiums. I won’t quote people who do not have current auto coverage because history has shown me that people who drive without insurance are not loyal and do not value the service I provide. Also, data has shown that those who want state minimum liability limits are higher risk. Some carriers charge more for minimum coverage than higher limits. Also, if the receptionist was renting, she would need a renters policy. This would save her up to 25% with some carriers and would also protect her personal property.
The industry’s embrace of credit score underwriting is so wrong in my humble opinion. The big 3 insurance companies built the largest insurance delivery system in the free world without such factors. Now they hire consultants to tell them how to sell insurance. We did it profitably and fairly. OF course we were using microfilm for our records. Perhaps this is the wrong way for technology to have taken us.
If credit scoring is so wrong, why do states allow it and insurance companies profit from its use?
The decision to use any rating factor is quite simple. Just ask 2 questions:
1. Does it improve profitability?
2. Is there evidence to support its use to the state?
The process of answering those questions is not so simple.
Ron, “Numbers don’t lie. But liars use numbers”.
Your responses sound just like what my underwriters tell me. There is no more underwriting in personal lines, just a list of what they don’t write anyway.
Please don’t try to dispute the infallibility of the insurance companies to us. The insurance has two objects, to make a profit and to provide an important service to the general public. Oftentimes, one takes precedence over the other.
I don’t dispute the benefit of insurance scoring as a predictive model. However, it is not perfect. A lot of times a client will have a bad score, then they come back 3 months later and the score has improved dramatically for any number of reasons. That alone disputes the credibility of insurance scoring. Are they a better driver now?
With respect to education and occupation, I don’t see any correlation for education and I have never seen any independent research supporting it. Occupation has a clear correlation and it isn’t intuitive. For example, we all know priests and ministers are high risk and realtors have high accident frequencies b/c they are always on the road.
What this ultimately comes down to is that the insurance carriers want to correct premium dollars from multiple cars, umbrella, home insurance, and all the other fancy products they come up with. With that money, the carriers make money on “float” through their investments.
But what do I know, I’m just in sales.
“What this ultimately comes down to is that the insurance carriers want to correct premium dollars from multiple cars, umbrella, home insurance, and all the other fancy products they come up with. With that money, the carriers make money on “float” through their investments.”
Yes, that is the business model, but insurance prices reflect the anticipated investment income, just like they do in life insurance.
That’s absolutely correct. The states limit the profit & contingencies provision, based on the insurer’s investment income. The better the investment income, the less profit they are allowed to incorporate into the rates.
When was I lying? I am just trying to help those who may not have a thorough understanding about ratemaking learn something about the process.
The reasons there is no underwriting in personal lines is because of the volume of policies, homogeneity, and lower profit margins that cause companies to focus on lowering expenses in order to compete.
Insurance, like any other for profit business has only 1 object, maximize profits. The fact that their products provide a service to the general public is a by-product.
No rating variable is perfect. For every person with a low insurance score who is a good risk you can find a 17-21 year old driver who is also a good risk. The problem is in how to isolate them from the rest of their group. That is why insurance companies use so many rating variables.
We need to stop thinking in terms of exceptions. How often to people improve their credit scores dramatically in 3 months? If that hapens, re-quote him/her with the new score. It is not feasible to make rates for every possible scenario.
I do not know any companies that use education as a variable. I am sure there are some, but I am not a fan. However, if there are companies using it, they would have had to provide support to the states in which they write the insurance. Meaning that someone saw a correlation and was able to prove its validity.
I never meant to infer that you were a liar. That quote was just in reference to the insurance companies referring to their statistical models as proof for rating. They can bend the data to suit their needs when filing for rating.
Believe me that I do understand all of what you are saying. With respect to the rating models out there. What needs to be clarified her is what is being posited by the CFA research and the insurance companies role is in providing a service to the general public.
CFA may be wrong in the way the went about in trying to proof their conclusion, we can all agree that their research was NOT scientific. But they are still right, insurance companies are discriminating one group over the other. The reason is because the carriers are no longer underwriting the risks like they used to. They shifted away from rating for driving experience and are now looking to collect premium on volume of cars and products. The consequence of this is that certain demographics may be inadvertently impacted by this.
This was all pioneered by GEICO who simply wants to collect a lot of premium as fast as possible so that Berkshire Hathaway can make their profit on float. The reason for GEICO focusing on auto is because there are an immense amount of data out their which allows them to hedge their losses quickly and do not need to rely on the volatility of the home insurance market thanks to climate changes and the weakened real estate market (that came from Warren Buffet himself). A lot of the carriers out there can no longer rely on home insurance premium to carry their company and need to find different types of innovation to try and stay profitable and compete with GEICO.
From experience let me tell you that states allow for very little bending of data in rate filings. They require very large samples and there must be a strong correlation in order to gain approval.
I do not have any problem with CFA or any other consumer advocacy group since I believe they do provide a service. However, I have a huge problem with either side of the argument putting forth insufficient or inaccurate information to support their case.
Yes, insurance companies do discriminate and there is nothing inherently wrong with that as long as it is fair discrimination. Every state has limits to what can be discriminated against.
The shifting from driving experience to other factors was a result of inconsistent loss ratios. Actuaries determined that there were other factors that contributed to loss experience besides just experience. In addition, increased granularity improved the accuracy of rates and helped stabilize loss ratios.
The insurance company’s backs are against the wall because the current business model of auto/home is not profitable like it used to be because of all the reasons I previously mentioned.
If we were to stick to the old model, a lot of companies would be running the risk of being insolvent between the generous PIP coverage on auto and the climate change on home insurance.
Non-Profits like CFA and some consumers don’t understand that we are a “for profit” business and that we won’t be able to remain profitable under the old model. But don’t tell that to the insurance commissioners either, because their interests are to serve the general public.
My gripe is with the fact that we, as agents/brokers, are on the front line and have to walk the fine line of protecting our carrier’s profits and to provide a meaningful service to ALL our clients. When you have to tell a client that their rate is high because they have bad credit or they do not have a college degree, even though they do not have points or accidents, it would only serve to infuriate them; especially when they know a friend that does have a college degree or good credit, yet they drive like crash dummies but still pay a lower premium. I can give the explanation of the shift in rating model from the carriers, but that still does not satisfy the customer who did everything right but is still getting rated. It is only natural for the customer to assume that “if I am a good driver, never had an accident, and had continuous coverage, I should pay a lower premium.”
I understand your position. I used to work for an agent. It is difficult to advise people how insurance rating works, but educating the client is part of the agent’s job.
Very few people enjoy all aspects of their job.
I am sure they understand insurance is for profit, that is the part of our industry on which they prey. People think insurance should not be as focused on profits as other industries. That may be due to the industry’s marketing of itself with the policyholder being in the good hands of a good neighbor who is on their side and saving you lots of money.
Apparently, the consultants advising some carriers aren’t doing a very good job at it. Carriers that continually take rate are having poor experience because their selection process is flawed. Some bought into the theory they could write a whole spectrum of drivers and just put them in different rating tiers based on score or violations/accidents. The safe drivers with no claims end up paying a higher premium because part of the book continually have claims. Progressive will take anything for a price and their model works for them.
Deciding what is “wrong” is quite challenging. When I entered the business in the mid 1980s, rating plans were simple and underwriting rules were complex. For example, I was taught subjective rules like never write someone in a preferred program who was divorced within the last year or never write someone who was a “contractor.” Those old rules have been replaced by the mindset of accepting a broader spectrum of risk but do so by segmenting the pricing by trying to use variables that are as objective as possible. I prefer what we do today vs the old subjectivity I was taught back in the day as the rating variables are developed based on empirical data.
I believe you are referring to the “there is no bad risk, only a bad rate” mentality.
Exactly. Or, as Rick Dorman said so many years ago “underwriting is dead, long live pricing.”
PM, Back in the day, we had underwriters who could evaluate risk and either accept it or decline it. Now, the industry is in the cost savings mode, so they have geek actuaries making a computer program that puts risks into boxes based on dozens of variables. There is practically no underwriting at all anymore. It is so complicated that few understand it. Now, they have early quote discounts and one can get a lower premium if the risk is quoted a week before the effective date. If the client waits until exp date, they pay a higher premium. I get frustrated that I can’t live with my original quote on some accounts. There is little stability out there on rating.
Does the aroma of the premium cover the stink of the risk?
Like.
If the aroma is sufficient to cover to the stink and provide some extra scent, yes. I would insure a burning building, effective the day before, if I can get the right premium.
Question for the agents out there… Are you selling the latest tool that records where the car is actually driving? AutoPM referenced it earlier.
I just attended a presentation from one of the data companies, now I want to know how it’s working. Will this “fix” rating? I really just curious, not researching a disertation.
So Ron, where would you place the burning building coverage the day before? You could write a $100,000 building for a premium of $95,000 with a $10,000 deductible and come out ok. If it turned out to be arson, you may do even better.
That is the basic idea. I would not expect any takers, more of a theoretical exercise.
I’d still charge a loss-free dynamite factory more premium than a barbershop with an $800 claim in the past 3 years though.
Carriers are always preaching bundling to get the best pricing. They will write unsupported Auto, but don’t want unsupported HO. When we try to bundle, often the Auto is the line that causes the problems on the total cost. It is really hard to find that ideal customer that is perfect on both. When we do, we are genuinely surprised. Add that in with a lot of carriers taking rate continuously and you have a problem coming up with something a prospect likes.
The CFA ‘study’ is fatally flawed because Bob Hunter (an actuary who should know better) did not compare variables equally. His two mock examples needed to be identical except for one variable like income or education. Then he would have a point. But because the two examples have more than one variable (notably the lack of continuous coverage) then you can make any extrapolations. The worse part is Bob Hunter KNOWS this as a former actuary.
In fact if you at the tables and do the math, which most of the mainstream reporters won’t do, you’ll see that the higher income, higher educated woman got the better rate only 31 times. The lower income woman got a better rate 20 times. In several other times thee was no difference. So how does that equal an unfair discrimination? It doesn’t.
It’s proof that this was all concocted to get publicity for the CFA and sadly most press outlets won’t spend the intellectual capital to look behind the numbers and see the study for the fraud it is.
The CFA’s study is fatally flawed because it allowed for more variables between the two woman than just education and income. Notably the lower income woman was not insured for 45 days which is a high risk factor. The study should have had that fact be the same for both. In fact the data sets for both women should have been EXACTLY the same except for one factor like income or education, then you could make the claim the CFA is making. And, sadly, Bob Hunter is a former actuary and KNOWS this. So clearly this was just an attempt to get publicity using flawed data to try to attack the insurance industry.
In fact if you look into the survey they used (and most reporters won’t spend the intellectual capital to do so), you’ll see that in 30 cases the executive got a better rate. But not always. In a full 20 cases the receptionist got a better deal. So how do you say that is improperly discriminatory?
What is good about the CFA’s press release is it calls attention to the fact that it is a very wise consumer tip to ALWAYS shop your insurance coverage at each renewal because the market is very competitive.
A 2003 study by EPIC Actuaries, LLC of 2.3 million insured autos and their drivers showed that drivers’ credit scores were the 3rd most important factor in predicting auto claims, even more important than drivers’ accident records. So, yes, the CFA study is flawed. The sample size is way too low, and the methodoly ignores many important variables. Hunter’s conclusion is laughable.
Gregg, Hunter is a joke. Ask any company rep that dealt with him in Texas for the few short years he was there and they will tell you the same thing. He is just a consumer advocate 100%. They will always say that any premium charged is too much and ignore all the loss data and business environment.
Every time I hear Mr. Hunter referred to as a “consumer advocate,” I cringe. His proper designation is “self described consumer advocate.”