Personal Automobile: Cost Drivers, Pricing, and Public Policy

Traditional actuarial pricing procedures have focused on pre-accident driver attributes, vehicle characteristics, and garaging location in an effort to explain personal automobile loss cost "drivers." Although these traditional factors are important for statewide ratemaking in a static environment, they account for only part of the influences on auto insurance loss costs. This paper draws on the industry research of the past 15 years to present a more comprehensive four dimensional framework for understanding auto insurance loss costs, comprising factors grouped into the following categories: Pre-accident drivers attributes and vehicle characteristics; Post-accident factors: claimant characteristics, medical providers, and attorney representation; External environment, such as road conditions and traffic density; Compensation system, such a tort liability versus no-fault As an illustration, the paper shows how territory, which is often considered a reflection of external conditions (such as road safety and traffic density), is more properly analyzed as a proxy for post-accident factors - specifically, the "treatment triangle" among claimants, medical providers, and attorneys in certain locations. The paper concludes with two proposed public policy reforms, demonstrating how the expanded four-dimensional framework for personal auto loss cost drivers facilitates the development of more efficacious methods for holding down auto insurance loss costs.