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Actuarial impact: How new deductible rating can improve insurer pricing of personal auto physical damage

You’ve probably heard the phrase, “death by a thousand cuts.” It speaks to the power of the accumulation of small change: No individual cut in isolation can kill, but the preponderance of wounds can be fatal.

This can also be true, albeit less morbidly, for rating relativities—the factors (typically percentages) applied against loss costs (or rates) that adjust them up or down to account for elements that may affect loss. Seemingly tiny tweaks to those rating factors can produce larger swings in insurer profitability when you multiply them across thousands of policies. It pays to be precise.

Circulars On Isonet

As part of our new actuarial research series, we’ve been probing our personal auto rating plan for just the kinds of adjustments that could yield useful insights for insurance rate setting—and we’ve found some for the deductible relativities applied to auto physical damage coverages (collision, for example).

Collision deductibles: How age and vehicle expense can affect loss

Insurers typically modify their loss costs/rates with a relativity to account for a policyholder’s selected deductible.

The current ISO table of advisory deductible relativities for personal auto collision coverage provides a single relativity factor for each deductible level from $100 to $2,500, irrespective of any other fact about the vehicle. That means, no matter how old or expensive the car is, all insureds with the same deductible would have the same deductible relativity applied to their policy.

But could we be more precise? The reality is newer and/or more expensive vehicles typically incur higher losses than older or less expensive vehicles when they’re in an accident. That means, assuming the deductibles are the same, insurers may want to tailor their premium pricing to account for these factors.

If we tailor the deductible relativity to account not just for deductible size, but for the vehicle’s value (based on age and original cost) as well, insurers may be able to achieve more refined pricing.

Imagine two hypothetical insurers writing personal auto in the same territory, using the same rating algorithm1 with one crucial exception—Insurance Company A uses the traditional deductible relativity in their formula (Premium = loss cost * profit and expense load * deductible factor), while Insurance Company B uses an enhanced deductible relativity that accounts for vehicle age and price (Premium = loss cost * profit and expense load * enhanced deductible factor). Here’s how it could play out with two different vehicles.

Circulars On Isonet

Through more granular pricing, Company B can offer the sedan owner a deeper discount than Company A for taking on the high deductible.  Similarly, Company B can offer the new sports car owner a low deductible option at a more modest surcharge than Company A. Thanks to this refined pricing, Company B could attract these insureds to their book.

As you can see, a deductible relativity that incorporates vehicle age and price could be a powerful pricing tool. After extensive research, the ISO personal auto actuarial team is releasing just these relativities for personal auto collision coverage2—as well as the research behind their derivation—here in Circular LI-PA-2021-030  (ISOnet login required). They won’t replace the existing deductible relativity table at this time, but they could be a useful complement for insurers looking to add even more granularity to their rates.  

Unearthing insights: About the actuarial research series

In addition to our normal rating-related information and actuarial circulars, we’ve launched a new actuarial research series to give customers insights on a range of analytical topics, starting with this work on personal auto deductible relativities. With this series, we’re hoping to deliver information and research at a faster pace when the results of our work (even intermediate results) become available. This series will give insurers exclusive insights to complement the rating plans we file with state insurance departments.

If you’d like to share feedback on the series, suggest a topic for future research, or learn more about ISO actuarial research activities, please email me at

  1. For the purposes of this hypothetical, we’ve created a highly simplified algorithm.
  2. While we focused this research on personal auto collision rating relativities, we believe a similar dynamic likely also applies to personal auto comprehensive coverage.

Raul Retian

Raul Retian is senior director of ISO Personal Lines Core Products. He can be reached at

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