By Jim Weiss
Are you prepared to insure the flying car? The aviation company Terrafugia has developed and road-tested an aircraft with on-road capability. Although the Transition® may be decades from commercial availability, automobile insurers are vying to keep pace with a flurry of other recent innovations, including lane departure and blind-spot warning systems, driver alertness monitoring, collision preparation systems, and self-parking. Vehicle rating programs that don't adequately consider the effects of such technologies may go the way of the Ford Edsel.
Automobile manufacturers often introduce new vehicle systems in a relatively small number of high-end models. As they gain popularity and acceptance, these innovations eventually infiltrate the vehicle mass market. Systems that promote vehicle safety often become federally mandated. This was the case for seat belts (mandated in 1968), airbags (1998), and, most recently, electronic stability control (ESC). Introduced in 1995, ESC systems — which prevent rollovers and sideways skidding — became relatively standard by 2001 and federally mandated for all vehicles beginning in 2012. Figure 1 demonstrates how the percentage of U.S. vehicles equipped with ESC has increased each year.
Traditional rating approaches are poorly equipped to react to such changes. Methods that rely exclusively on credible experience for each vehicle model take years to capture all the effects of innovation. In the meantime, those rating plans may produce counterintuitive results. For example, ESC systems were initially available as costly optional equipment. As such, programs using MSRP (manufacturer's suggested retail price) as a proxy for experience derive higher loss costs for vehicles with ESC than for identical vehicles without it — a less than ideal situation.
Fortunately, modern rating approaches are able to respond more quickly and effectively to innovations like ESC. Statistical techniques treat every vehicle model as a unique set of attributes, with body style, dimensions, performance metrics, and safety equipment and ratings each affecting loss propensity. In this way, the vehicle's estimate is the sum of the effects of its individual attributes. Virtually identical vehicles are likely to receive identical treatment, whereas ones with new safety systems are likely to receive discounts.
The ISO Risk Analyzer® Personal Auto Vehicle Module for Physical Damage is now available in ISO's suite of comprehensive analytic tools that help better predict future expected loss. The module — consisting of separate frequency and severity models built by coverage — uses vehicle characteristics to predict collision and comprehensive loss cost relativities at a highly refined level. ISO Risk Analyzer is able to identify different levels of risk within a vehicle series based on individual vehicle model attributes. This represents a significant step in the evolution of vehicle rating compared with present methods.
ISO bases its current Vehicle Series Rating (VSR) Symbols primarily on a vehicle's manufacturer's suggested retail price (MSRP) and loss history. By contrast, ISO Risk Analyzer Personal Auto Symbols use information from individual vehicle attributes, also called components (such as body style), and performance and safety features, as well as information related to the MSRP and loss history.
VINMASTER® delivers the ISO Risk Analyzer Symbols in a two-character alphanumeric format composed of a "price new" character and a "vehicle attribute" character. This allows insurers to take advantage of the current two-character approach and delivery method of the VSR Program with minimal systems impact and more refinement. For insurers building their own models, components (statistical submodels) for collision and comprehensive are also available separately by peril. Visit the ISO Risk Analyzer product website for more information.
In some cases, the effects of new technology are challenging to estimate. Collision preparation systems may help prevent accidents and protect occupants from harm. However, they can also make vehicles more costly to repair or replace. There may be value to performing separate frequency and severity analyses by coverage or even by comprehensive peril — a flying car may be susceptible to wind-related damages but relatively safe from falling objects. Insurers who develop rating plans at such a refined level are better equipped to understand and respond to changes in vehicles.
An attribute-driven approach is not a panacea. No statistical method can overcome a complete absence of empirical data; therefore, as a precondition for rating, a vehicle system must first go to market in a representative sampling of vehicles. Rating plans must also be continually reevaluated to guarantee that they reflect technologies that have become commercially available. Expertise in non-actuarial disciplines may be required to describe these innovations in quantitative or qualitative terms for use in pricing. For example, the effectiveness of collision preparation systems may vary among manufacturers, but since almost all involve braking, a more reasonable and consistent metric for rating might be braking distance.
Despite the challenges, vehicle rating has come almost as far as vehicles themselves. Auto insurers may not be ready to insure the flying car, but those on the cutting edge of technology will find themselves far ahead of less forward-thinking competitors for years to come.
Jim Weiss is assistant manager of personal automobile actuarial at ISO, a leading source of information about property/casualty insurance risk.