Posted on 10 Apr 2009
Quality Planning, the ISO company that validates policyholder information for auto insurers, has released proprietary findings that confirm a strong correlation between miles driven and auto insurance claim costs. With some auto insurance companies eliminating annual mileage as a factor for determining insurance premium pricing, the recent study reveals why both consumers and companies get a better deal when auto insurance premiums are calculated in relation to miles driven. The findings are of particular interest to consumers looking to lower their auto insurance premiums, and to auto insurers looking to attract bargain-hungry consumers by reducing rates.
During today’s challenging economic times, many consumers are driving less — and as a result, they expect their auto insurance premium to fall. However, many insurers are simply not able to respond to that dynamic. Over the past few years, a number of companies have relied less and less on individual driving habits. Their rates don’t consider miles driven or even time spent inside a vehicle — in spite of the fact that only those policyholders not driving their cars can be truly accident-free. Other companies group drivers into large mileage buckets (more than/less than 7,500 miles, for example) and price all members of the group similarly.
Clearly, annual mileage should be a major determinant of auto insurance pricing. And drivers who drive less should be rewarded accordingly. Quality Planning studied approximately 500,000 insurance policies and found a significant difference in average claim costs between high and low annual mileage groups. The lowest annual mileage group (0–3,000 miles) had 44 percent fewer claims as compared to the average, while the highest annual mileage group (more than 20,000 miles) had 28 percent more claims. Within a broad mileage range (for example, 0–7,500 miles) loss costs can be 12 to 15 percent higher for drivers at the high end of the mileage band, and 20 to 25 percent lower for drivers at the low end of the mileage band, as compared to the average for that range.
Many insurers are not providing consumers with clear incentives to accurately predict annual mileage and commute miles, nor are they taking steps to regularly validate these key rating variables. Many insurers have broad mileage bands that prevent them from offering competitive pricing. Broad bands such as ‘0–5,000,’ ‘5,000–12,500’ and ‘more than 12,500 miles’ fail to distinguish a pleasure-use vehicle owner who drives 5,500 miles a year from a heavy commuter who drives 12,400 miles per annum. With all other factors being the same, these two policyholders — with very different driving habits — would be charged the same premium.
To illustrate the potential of finely graduated annual mileage pricing, especially for low-mileage drivers, Quality Planning grouped average claim costs within narrow mileage bands and compared these with broader mileage bands used by some insurers. The baseline claims cost for the ‘0-3,000’ mileage band is set at $100. As an example, someone in the ‘8,000–10,000’ mileage band has a relative claims cost of $142 — i.e., 42 percent higher than someone in the ‘0–3,000’ mileage band.
Quality Planning’s analysis suggests that companies with more mileage bands in their rating plan can benefit by the improved risk segmentation and pricing, and enjoy an advantage over their competitors (as long as they have an effective strategy to verify their customers’ annual mileage every year). Conversely, if they do not assign the correct mileage categories for a policy, or if they have very few mileage bands in their rating plan, they risk losing customers, losing revenue, and facing higher claim costs not adequately covered by the premium they charge.
“Consumers justifiably believe that if they’re driving less, they should pay less for their insurance, and indeed the claims statistics support that,” said Dr. Raj Bhat, president of Quality Planning. “Our study shows that those insurers who fine-tune their premium to a customer’s driving habits will be better positioned to offer competitive pricing. In the past, it was difficult to validate annual mileage and commute distances, which resulted in insurers having few or no mileage bands. Today, it’s easy to integrate accurate annual mileage verification into the auto underwriting process, using the best available techniques. Insurers who do so will certainly outperform their peers.”
The uncertain economic environment has caused a significant drop in insurance company investment income making it even more important to rely on solid underwriting to deliver both shareholder and policyholder value. Failure to do so results in:
* Low-mileage drivers subsidizing high-mileage drivers.
* Those correctly reporting their mileage subsidizing dishonest individuals.
* Low-risk drivers subsidizing higher-risk drivers.
* Erosion of annual mileage as one of the most predictive rating variables.
Quality Planning sampled 459,599 single-vehicle policies from multiple carriers during 2003 to 2006. Claim data from that period was used to evaluate policy period claim costs. Bodily injury, property damage, and collision coverages were included in the analysis. The data was then separated into 20 annual mileage groups with the same number of vehicles in each group. The annual mileage estimates were obtained from Quality Planning’s proprietary RISK:check® process, which uses statistical estimates and odometer readings, when available.