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Taking a Hummer down the Yellow Brick Road

In L. Frank Baum's novel The Wizard of Oz, farm girl Dorothy befriends a scarecrow, a tin woodsman, and a cowardly lion who long for attributes such as a brain, a heart, and courage. While this merry band of misfits eventually sees their wishes granted (albeit not in the manner they expect), the idea that cars might possess such humanlike characteristics once seemed as fantastic as Baum's novel. However, new innovations from Google, Toyota, and others are challenging traditional assumptions and rewriting the rules for auto insurers.

Vehicles presently under development by Google have the one quality the scarecrow lacked – a brain. The Google Car, which has neither a steering wheel nor braking pedal, is capable of “operating itself” at speeds up to 25 miles per hour. Such functionality has its roots in existing vehicle technologies including adaptive cruise control, which uses radar determine a safe distance from other vehicles, and automatic braking, which uses cameras and lidar to determine when there is danger in the vehicle's path. Presently these features are available mostly as optional equipment on selected manufacturer's vehicles.

Toyota's “heart project” takes a different approach to vehicle automation, which someone like the tin woodsman might appreciate. The latest concept car originating out of the project, the FV-2, incorporates a vehicle operator's emotions into the driving experience. For example, the FV-2 -- like the Google Car -- does not have a steering wheel. However, whereas Google's car travels along a user-specified route, the FV-2 “reads” the operator's body movements in order to steer the car. The vehicle can also read the driver's cues to, say, cool the ambient lighting if it senses the driver is becoming agitated.

Google's and Toyota's innovations reflect two trends as opposed as the Good Witch of the East and the Wicked Witch of the West. The first (reflected by the Google Car) is to improve vehicle safety by reducing the possibility of human error, while the second (embodied by the FV-2) is to enrich the driving experience. Auto insurers seeking to understand how these trends affect their liabilities require analytical approaches that keep pace with automotive innovation.

The idea of considering a vehicle’s characteristics in pricing liability is fairly new. It was once thought that a vehicle’s architecture and safety record were only impactful for physical damage not liability. However, increased production of heavier vehicles such as sports utility vehicles (SUVs) in the late 1990s and early 2000s led to approaches such as ISO’s Liability, PIP, and Medical Payments (LPMP) Symbol program, which varies loss costs based on vehicle series experience. In this way, a series such as the Hummer H2, a “heavyweight” capable of inflicting great bodily harm, might receive a higher Liability rating factor (1.40) than the 2-door Toyota Yaris, a “featherweight” (0.85) that wouldn’t even scare the cowardly lion were he to encounter one along the Yellow Brick Road.

However, techniques such as LPMP, while an improvement over earlier ones (or lack thereof), are imperfectly equipped to keep up with innovation. LPMP requires a credible body of experience to accrue on each vehicle series in order to develop a robust prediction, so predictive stability for a newer vehicle may require years of waiting. Also, because of its volume requirement LPMP may group ordinary H2s and (in a purely hypothetical example) H2s with automatic braking systems in order to achieve “actuarial credibility” more quickly. In contrast, advanced techniques such as ISO Risk Analyzer Vehicle Module for Liability consider each vehicle as its own set of attributes. This is important because, in addition to evaluating what it “means to be a Hummer H2” over time, they also consider the effects of (say) weighing three tons, being 80” x 80”, having a 6-Liter engine – or having strong braking ability.

The advanced approach presents many benefits. For brand new vehicles or ones that have recently been redesigned, analysts need not wait for experience to accrue, but rather can derive robust initial estimates by looking at the loss effects of each vehicle’s body style, dimensions, performance metrics, and safety ratings (such as those developed by the Insurance Institute for Highway Safety). As a result, identical or similarly architected vehicles with different names are likely to receive similar estimates, whereas there is no such guarantee under a more traditional approach. Also, in the hypothetical case of the H2 with automatic braking, analysts can leverage the predictive power of other vehicles with similar safety systems, in order to provide an actuarially justified discount over the ordinary H2 for, say, improved braking distance. Being able to reach better answers faster helps insurers to keep pace with innovation and reflect different safety and convenience features within series.

Google and Toyota are equipping cars with brains and hearts that the scarecrow and tin man lacked, but it is up to insurers to demonstrate the courage the cowardly lion sought. Specifically, insurers rating cars with advanced safety and convenience features must summon the courage to incorporate commensurately advanced analytical approaches into their business models. New safety features do not always pan out, for example, early anti-lock braking systems were found to significantly increase rollover risk. Meanwhile, convenience-oriented features such as rain-sensing windshield wipers may present ancillary safety benefits. But proactive, data-driven approach to auto liability can help discern these differences relatively early and help insulate insurers from adverse selection.

Jim Weiss

Jim Weiss is the director of analytic solutions for ISO, where he helps develop and implements the ISO Risk Analyzer® suite of predictive modeling products and services. Mr. Weiss is also leading new efforts to use social media and wellness analytics in property/casualty insurance. His articles have been published in Carrier Management, Telematics Wire, and Verisk Review, and he often presents insights at insurance industry events such as those sponsored by the Property Casualty Insurers Association of America and the Society of Insurance Research. Jim graduated with a bachelor of science in mathematics degree from Manhattan College and has earned the designations of Fellow of the Casualty Actuarial Society (FCAS), Member of the American Academy of Actuaries (MAAA), and Chartered Property Casualty Underwriter (CPCU).

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