tential contributing factors include:
•;Density: Miles driven are at unprec-
edented levels, correlating with more
accidents, but the effect on risk is not
necessarily linear. More driving also
puts more vehicles in proximity to
one another, producing a further mul-
•;Distracted driving: Figure 4 documents
that many drivers admit to engaging in
unsafe driving behaviors. Pervasive interactive technology brings distractions
behind the wheel that may be increasing
frequency and severity for insurers.
•;Defective vehicles: Despite the rebound
in auto sales, a dichotomy remains between new and old vehicles. Newer cars
tend to drive up property damage claim
severity, while a small but increasing
number of unsafe older vehicles may
partially explain the growing number
of severe accidents. Verisk’s analyses
of data supplied by three large insurers show branded titles (prior total-loss
vehicles and vehicles deemed beyond
their mechanical limits) have more than
doubled over the past five years.
Where the road leads
Auto claims frequency is back at prere-cession levels, and severity has reached
record highs — which may explain why
many insurers are raising premiums. But
these trends are ill-timed when considered beside broader disruption in the
industry. Advances in technology and
analysis are placing competitive pressure on insurers to improve the customer
experience and refine underwriting and
rating as never before. And simply raising
prices may fail to mitigate the frequency
and severity squeeze.
Premiums for personal auto insurers
grew 5. 5 percent in 2015, but that has
been insufficient to compensate for rising losses. Data reported to A.M. Best
shows auto insurance adjusted loss ratios
up a half percentage point in 2014, and
almost two-and-a-half percentage points
in 2015. Further, a Verisk analysis of this
data over the past three years shows that
only one in five premium dollars belongs
to insurers that are hitting the sweet spot
of profitable growth.
Verisk estimates the cost of premium
leakage — revenue lost through misreported or omitted underwriting information — at 10 to 15 percent of annual direct written premium. The 2016
Verisk Auto Insurance Premium Leakage Survey found more than 80 percent
of insurance leaders at least “moderately
concerned” over premium leakage. But
insurers can access tools to achieve and
maintain better alignment between risk
and premium over time.
• Mileage: Since underestimated mile-
age accounts for more than 18 percent
of leakage and mileage strongly corre-
lates with frequency, accurately captur-
ing mileage over the life of a policy can
help refine rating and stem rising losses.
Many new tools, including sophisticated
analytics, smartphone apps and vehicle
telematics can help empower insurers.
•;Rating symbol models: Using predic-tive modeling that accounts for frequency and severity by make and model can help insurers adjust to the higher
costs of repairing the newest vehicles.
• Loss history indicators and driver
monitoring: The increase in frequency
and severity means that in a hardening
market, customers who are dissatisfied
with rate increases will shop more. Loss
history indicators and driver monitoring are cost-effective ways to identify
recent claims or violations early in the
• Prioritized pursuit: At point of sale
and renewal, insurers can use sophisticated risk scores and projected losses
for drivers and vehicle types — for example, a safe driver with a minor infraction or a vehicle with a branded title —
and help inform decisions that balance
short-term premium pursuit against
potential lifetime policyholder profits.
A novel combination of factors is influencing trends in auto frequency and
severity — although what’s novel now
may become normal in the future. The
trends remain a puzzle and a challenge,
but they can be managed with the right
tools that help break down data to reveal
underwriting insights. Insurers should
act to get ahead of the changes, or they
may find they can only react.
John E. Cantwell is vice president of
product management at Verisk Insurance
Solutions, a Verisk Analytics (Nasdaq:VRSK)
business. Dorothy E. Kelly is director
of product management for personal
underwriting at Verisk Insurance Solutions.
Advances in technology
... are placing competitive
pressure on insurers to
improve the customer
In the past 30 days, have you driven
10 mph over speed limit on a residential street?
In the past 30 days, have you driven
15 mph over speed limit on a freeway?
In the past 30 days, have you read a
text message or e-mail while you were driving?
In the past 30 days, have you talked
on a cell phone while you were driving?
In the past 30 days, have you typed or
sent a text message while you were driving?