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Determining the Price of Personal Auto Insurance. Underwriting How insurance companies evaluate risk. selective about who they choose to have as customers Looking for that ideal customer Goal is to insure customers with few claims. Insurance Application.

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underwriting how insurance companies evaluate risk
UnderwritingHow insurance companies evaluate risk
  • selective about who they choose to have as customers
  • Looking for that ideal customer
  • Goal is to insure customers with few claims
insurance application
Insurance Application
  • They also rely on the opinion of the insurance agent.
  • Application includes:
    • Age of driver
    • # of tickets
    • # of accidents
    • Type of vehicle
    • Age of vehicle
    • Vehicle use

Make sure you are honest –

not telling the truth might jeopardize coverage by the insurance company -- denying your claim.

  • Underwriters can accept or reject the application.
  • They can also accept the risk with higher premium (your payment)
  • OR……reduce the insurance coverage - Higher deductible (what you pay before the insurance co. pays the claim)
  • Insurance companies need to determine the best risk for their company
you decide
You Decide
  • Today you are the underwriter for a personal automobile insurance company.
  • You receive two applications:
    • 25 year old ---no accidents or tickets or previous losses
    • 25 year old --no accidents or tickets but has five broken windshield claims. Each windshield costs $450
  • What would you do with these risks?
pricing insurance
Pricing Insurance
  • Losses are not known until after the policy is written
  • Insurance companies need to pay:
    • Expenses - salaries, losses, operation costs
    • AND make a PROFIT.
  • Insurance is state regulated so they can not charge whatever they wish.
    • Can not be too high, too low or unfairly discriminate.
  • Helps insurance companies
    • determine pricing
    • how many people will have a claim.
  • Trained in math and statistics
  • Use past loss history to predict the future to develop a rate

Law of Large Numbers

Since insurance companies do not know how much they will pay out in claims …………

They use the Law of Large Numbers to Price Insurance

law of large numbers
Law of Large Numbers
  • A statistical principle that indicates that the larger the number of examples, the more accurate and predictable the statistic will be
  • Loss frequency
    • How often they expect a claim to occur
  • Loss severity
    • How much damage or injury they predict will happen in a loss.
you do the math
You Do the Math
  • Start with 100 individuals driving a

Honda Accord Cost : $25,000

  • Assume that if involved in an accident your vehicle is a total loss.
  • Assume the chance of being in an accident :

1 out of 100 people

  • Total loss:

_______ / # insureds_______ = base rate

how is the cost of auto insurance determined
How is the Cost of Auto Insurance Determined?
  • Base rate reflect --
    • Loss Frequency AND Loss Severity.
  • Adjusted up or down based on coverages you choose
    • higher limits makes rate go up
  • Based on average
    • If you are higher risk and have more chances of loss you will pay more.
who do you think should pay more in insurance premium
Who Do You Think Should Pay More in Insurance Premium?

Individuals living in large city

Individual living in

small town or in rural areas

risk factors
Risk Factors
  • Primary:
    • Age, gender, marital status
    • Annual miles on vehicle
    • Use of auto
    • Driving Record
  • Secondary:
    • Age, make, model of vehicle
    • Number of vehicles
    • Garaging location of vehicle
  • Other Rating Factor:
    • Limits of liability, deductibles, discounts-
        • Driver Training Credit
        • Good Student Credit
        • Student Away at School Credit
        • Multi- Car Credit
  • Do male or female drivers have more accidents?
  • Are speeding tickets indicator of chance of accident?
  • What vehicles stolen more often?
  • What is safety/crash record of a given vehicle?
  • What are weather conditions? North winters versus South winters!
calculating the final insurance premiums
Calculating the Final Insurance Premiums
  • Base rate x ( primary + secondary rating factors)= Premium
  • Base rate may be same for group, but once you factor in:
  • Age
  • Driving record
  • Type of vehicle
  • Credits etc.

each person gets a different insurance premium

how can you help lower insurance premium
How Can You Help Lower Insurance Premium?
  • Control risk factors by:
    • Buy car with safety features- side air bags, adaptive cruise control
    • Defensive driving- education courses
    • Security systems: electronic locks, disabling devices
    • Use public transit Car pooling
    • Formal agreements not to drink and
    • Buying homeowners and automobile insurance from the same insurance company
    • Purchase higher deductibles
where does your insurance premium dollar go
Where Does Your Insurance Premium Dollar Go?

Premium-(Claims Company Pays + Expenses)= Their Profit

  • Every $1.00 collected in insurance premium the insurance company pays out:
    • 70 in claims
    • 28 in salaries, commission to agent, utilities and rent or mortgage.
    • That leaves 2 for profit.
investment income
Investment Income
  • When insurance company pays out more than premiums collected ---


  • Investing premiums that the insurance company is holding until they have to pay claims --- money they make -----


This increases the profit they make on handing insurance

  • Investments are very conservative and regulated by law. Typical low risk items such as U.S. treasury notes and bonds.
insurance careers
Insurance Careers

Know that you know more about how insurance is priced do you think you would want to be an actuary



when you graduate?