Abstract

Leonard T. Guarini and Edward P. Lotkowski

Abstract

This paper is intended to stimulate further research and discussion on the validity and utility of model year rating for personal automobile coverages other than physical damage. Using data from a single insurer and some elementary statistical techniques, we provide evidence supporting model year as a classification variable for automobile liability and injury coverages.

Key words and phrases: age rating, risk classification, loss ratio, claim frequency, claim severity

Mohammed Q. Ashab

Introduction

I congratulate Messrs.\ Leonard T. Guarini and Edward P. Lotkowski on their interesting and innovative paper. I know of no other paper that purports to use a rating variable that traditionally is reserved only for physical damage coverages (i.e., model year) also to price auto liability (and injury) coverages.

My comments will be restricted to a practical observation and a minor note on the paper. >From a practical perspective, I don't believe companies would use model year to price auto liability (and injury) coverages. Even if the authors' proposed use of model year were accepted and endorsed by regulators, companies would be reluctant to implement it in the marketplace due to competitive reasons and strategies.

To see this, assume that the market is competitive. All other things equal, a company that tries to use model year to price its auto liability (and injury) coverages would be driven out of the market for more recent model years and would undercut the competition on older model years. The more recent model year cars would be rated with model year factors greater than unity, while the older model year cars would be rated with factors less than unity. I don't believe companies would choose to be competitive only for older cars and leave newer cars to their competitors. This would be a poor competitive strategy even if older cars produce better loss ratios than newer cars. Therefore, using the model year for other than physical damage coverages would be prohibitive.

Messrs.\ Guarini and Lotkowski also give some reasons on the desirability and appropriateness of model year rating when compared with age rating. While the reasons are well-known to all practicing actuaries, an additional advantage of model year not stated in the paper is that model year allows companies to achieve greater differentiation in their rating structure than under age rating because ten or more model years are substituted for three to five age groups.

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Cheng-Sheng Peter Wu

Introduction

The paper by Messrs. Leonard T. Guarini and Edward P. Lotkowski presents data supporting their view that private automobile loss costs correlate with the model years of vehicles: the newer the vehicles, the higher the loss costs. Not only physical damage coverages, but also liability and injury coverages exhibit such model year cost differences. The paper explores the idea of applying model year rating to liability and injury coverages.

The loss cost inflation associated with private automobile insurance is volatile because the underlying frequency and severity trends are affected uniquely by external economic conditions. During recession the vehicle repair cost is low. Also, a higher unemployment rate reduces the frequency of accidents because fewer persons drive to work. When the economy is recovering, both frequency and severity tend to rise.

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