Good News and Bad News about Car Accidents, and What You Should Know to Keep Your Insurance Premiums Down
Good News: Crain’s Chicago Business reports (HT Instapundit) that vehicle accidents reported to insurance companies are falling:
American drivers are reporting fewer crashes to their insurance companies than ever before, and nobody knows precisely why.
Insurers can’t explain the drop in auto claims. And while theories abound, the lack of a clear, identifiable reason is unsettling in an industry that relies on sophisticated statistical modeling to predict its claim payouts. Those predictions are used to set premium rates, to decide whom to insure and to provide earnings guidance to Wall Street.With no explanation for the drop in claims, insurers can’t tell if the trend will continue, leaving many at a loss.
….. Industry-wide, auto-collision claims fell from 6.91 claims per 100 insured vehicles in 2001 to 5.91 claims per 100 insured vehicles in 2005, according to the Property Casualty Insurers Assn. of America.
Bad News: As noted, insurance companies don’t like things they can’t explain. The companies are therefore not lowering rates as much as might be expected in a competitive environment, for fear of being blindsided by a sudden spike in accidents.
The possible factors in reported accidents cited in the article, and my take on them, are these:
- High-end technology in some vehicles is preventing many accidents. The trouble is, there aren’t very many such vehicles on the road, so at best this is a minor influence. As these wonder cars are extremely high-end and costly vehicles, it may be that their owners are on average be safer drivers anyway. The article did not mention that the non-wonder vehicles coming off the assembly lines today probably are safer than the ones produced five years ago.
- The aging of the Baby Boom generation. This one makes sense. Drivers tend to improve with age (up to a certain point), and the 1946-1954 Boomer population bubble is now between ages 52 and 60, with their most accident-prone years behind them.
- Maybe there are fewer reported accidents because there are fewer ACTUAL accidents. The trouble is, as noted in the article, The National Highway Traffic Safety Administration (NHTSA) believes that the decline in accidents reported to the police is a function of changing standards for reporting accidents and drivers choosing not to report them in non-injury situations.
- More drivers are choosing higher deductibles, meaning that more fender-benders might be below the deductible threshold. I’m not buying this one, because it doesn’t take much of an accident to get above even a $1,000 deductible threshold any more.
- Tougher standards for teenage drivers. I’d rate this one as a pretty important contributor. This link, though relating to fatalities, would seem to confirm that Graduated Drivers License programs have on average created safer teen drivers. Perhaps the accidents teens do get into are also on average less serious and less damage-producing.
- Tougher drunk-driving laws. This 2006 NHTSA report relating to 2004 (PDF) shows that alcohol was involved in 39% of vehicle fatalities that year, continuing a long steady downward march from the 50% level many years ago. It would follow that in general fewer drivers are driving while impaired and are therefore getting into fewer accidents.
Although some of the factors noted would be arguments that the number of accidents really has gone down, let’s accept the skepticism of the insurance industry and NHTSA as a given.
With that assumption, I believe the industry and the government are missing one VERY important thing: People, perhaps with the help of their insurance agents, are getting better at figuring out whether a given accident will trigger a big premium increase. Since moving into a high-risk driver category can often mean that premiums will triple or quadruple, they are doing everything they can to avoid reporting accidents that will cause that trigger to be pulled.
Please keep in mind that I can’t predict what every insurer will do with a given set of facts. Having said that, there are some general points I can make about how insurers tend to handle things.
First, there is the combination of number of at-fault accidents and moving violations during the past three years. A person with a good long-term driving record will often get a “freebie” and won’t be penalized for their first at-fault accident in the absence of more than one moving violation. Such a driver should be very reluctant to report a second accident, especially one where the damage involved is not very far above the deductible threshold.
Note that I said “often get a ‘freebie’” in the previous paragraph. There is a category of driver that is likely to get moved into high risk in just their first at-fault accident — those with low credit scores.
The industry’s logic is that people with low credit scores are too busy thinking about the financial mess they are in to concentrate as much as they should when they are behind the wheel. Although this discrimination seems unfair, the industry claims to have the statistics to support their contention. I believe there are states that have outlawed the practice of considering credit scores in underwriting, but at most it would only be a few.
The point is that more drivers with “less than perfect” credit have come to learn that their situation makes any at-fault accident they are involved in a potential financial disaster. So of course they avoid reporting accidents to their insurance company if they can avoid it.
I believe the industry is going to figure out that the decline is probably for real and here to stay, and as that happens rates will come down, or at least won’t increase as much as general inflation. Insurance customers can “drive” this process to occur more quickly by shopping their coverage or getting competitive quotes and asking their agents to match them.
If you didn’t know about the influence your credit score can have on your vehicle insurance premium, now you do, so you have another reason to keep your score high if it already is, and another incentive to improve your score if yours is in the low 600s or below.
The insurance industry may suggest that low credit scores keep drivers from concentrating on the road, but I’d argue the _real_ reason they consider low credit scores a risk factor for accidents is insurance fraud. They are quick to accuse claimants of fraud when they uncover financial problems in the insured’s personal life. The most recent Wired magazine had a story that touched on this; one victim of auto theft was denied a claim partly because he was going through an expensive divorce and the insurer thought he’d arranged the car theft to make some quick cash.
It’s also true that an insurance adjuster’s primary job is to get out of paying claims, and any available excuse will be used, including the customer’s credit score.
Comment by Jeff — July 31, 2006 @ 1:35 pm
#1, The fraud issue is a valid consideration (and thx for the Wired item), but probably overplayed by the industry.
As to the adjuster and credit scores, stop me if I’m wrong, but I don’t think he or she gets to see them during the claims process. The scores come into play once the accident is settled and it’s time to determine what, if anything, will be done to the person’s premium.
Comment by TBlumer — July 31, 2006 @ 4:47 pm
Why do insurance companies use credit scores to help them increase rates? Because they can! Insurance is one of the biggest scams since Socialist Security. Insurance companies lobbying for draconian speed limits along with absurd blood alcohol limts add to my distrust of insurance companies in general. They are more than happy to collect premiums for years without any incidents, but trying to get them to pay out is like pulling teeth. (Note: I have never been in an accident that was my fault and currently have no moving violations on my record or any history of violations other than speeding. I speak from principle, not self-interest.)
Have you ever seen the belief that men cause more accidents updated for the modern world? In the past, many more men drove, ensuring that they would by shear chance. Is this still true? Also, even today, men dominate professions where driving is the sole or a large part of the jod description. I don’t believe that this descrimination should be allowed in the modern world. I didn’t make the rules, but shouldn’t we try to be consistant?
Comment by Steven J. Kelso Sr. — July 31, 2006 @ 5:20 pm
Howdy — actuarial type here (disclaimer: still taking the exams and I’m in life, not property&casualty insurance)
Items that raise “bogus” for me: age and deductible. Actuaries use these in setting rates. They know higher deductibles result in fewer claims, and they model that. I’m not sure what rating variables are allowed in most states, but if not age, length of driving record most certainly is used. I don’t drive now, but I’m pretty sure one’s age is on the insurance application.
As for low credit scores, insurance fraud is indeed a big risk — not necessarily people doing something as obviously illegal as faking thefts, but more in the “grey” area of ginning up the claims. The claims adjustor can prevent this, but when the claim is relatively small, generally they won’t look into it too deeply. Say you need to get new tires or something else that wasn’t actually damaged by the accident… that sort of thing.
That’s one way of thinking with the low credit scores. Another way is turn it on its head — what about people with great credit scores? They are assumed to be responsible people who take care of their possessions (or have money to waste). Paying bills on time is a sign of conscienciousness. That’s not to say they can’t be crappy drivers, but one assumes people with crappy credit may have trouble with being responsible. You don’t end up with bad credit by accident, that’s for sure.
I haven’t read all the latests posts in the P&C section of the Actuarial Outpost, but I’m thinking that the restrictions re: teen drivers and drunk-driving laws may be where most of the impact is coming from. The teen rates are really high, and if there’s something that keep them from driving in the riskier situations (with other teen passengers or late at night), that will cut down on the risk… but the actuaries should have the data as to who caused or were at least involved in accidents. They should see if there’s a difference between states with regards to law. It could be that this data is so new, that they’ve not had a chance to see where the real trends are coming from.
The one thing they don’t have data for is accidents where claims weren’t filed. I think you’ve hit onto something there.
Comment by meep — August 1, 2006 @ 7:36 am
But we don’t have tougher drunk driving laws. We have the existing drunk driving laws applied to people who are less drunk and therefore relatively less likely to be involved in accidents. Tougher drunk driving laws would scale the penalty to the blood alcohol content and focus on those who are hog-whimpering drunk.
Comment by triticale — August 1, 2006 @ 7:44 am
#3, Your take doesn’t square with mine, except in one situation I hope to be able to say something about soon.
#4, I wish the industry would share the data they say they have with the regulators (I don’t think they have, and they should — confidentially, of course).
#5, the ENTIRE drop in fataliites from 50,000 to about 42,000 can be attributed to lower alcohol involvement in the fatal accidents (1979’s 50K fatals were half alcohol-related, or 25K; 40% 2004’s 42K were, or 17K; difference is 8K, same as overall difference). That said, i believe the drop in BAC to .08 was overkill.
Comment by TBlumer — August 1, 2006 @ 9:27 am