(September, 2018)
Underwriting a submission for coverage under the Insurance Services Office (ISO) Personal Auto Policy (PAP) involves assessing the acceptability of vehicles and their operators. The following considerations are traditional underwriting issues. With increased use of automation, greater reliance has been placed on automation-assisted underwriting tools, such as credit scores.
The definitions section of the Personal Auto Policy explains which autos are eligible for coverage. Generally, protection is available for private passenger automobiles, SUVs, pickups and vans. The PAP Declarations page includes a vehicle description, coverages, and limits and, if applicable, a deductible for all vehicles covered in the policy.
Underwriting a PAP includes the consideration of several factors, one being the classification of each vehicle to be covered. A vehicle’s classification is determined by the following:
· Auto symbol.
· The vehicle’s performance (standard, intermediate, high or sports). Note that this may be included in the vehicle’s symbol.
· Make, model and serial number of each vehicle.
· The use of each vehicle (pleasure, commuting to work or business).
· Vehicle age.
· Vehicle cost new or stated value.
· The type of protection and safety devices installed on the vehicle.
· Vehicle garaging location.
· The vehicle’s annual mileage.
· The existence of custom features, special equipment or expensive accessories.
Underwriting a vehicle is a matter of determining whether it matches the market that is desired by the insurer. A standard or preferred carrier has to be careful to write vehicles that have characteristics that fit its rates. Private passenger autos that have very high values fall outside the rating norm so are avoided by the standard/preferred personal auto market. Too many custom features may also force a vehicle to a specialty market.
Related Article: ISO Special Personal Auto Policy Coverage Form Analysis
Of course, different characteristics should be considered as a whole in order to determine overall eligibility. Consider the following:
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Possible Marginal Risk |
Mitigating Circumstance |
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A vehicle that is heavily loaded with permanently-installed, expensive sound and video equipment. |
The vehicle is kept in a locked, alarmed-equipped garage at night and in a secured, employer-supplied parking enclosure during the workday. The vehicle also has a state of the art anti-theft system. |
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An older vehicle that is submitted for full coverage. |
What if the owner agrees to a very high deductible? |
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The vehicle submitted is an expensive, high performance model. |
The vehicle is only driven occasionally by a mature operator and no other drivers are in his household. |
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A pickup used for towing broken equipment |
That pickup is used by a farmer and it rarely leaves his farm. |
An individual company’s underwriting guidelines consist of assumptions about what risks are acceptable. A vehicle characteristic that falls outside of one parameter may be balanced by other considerations.
It is critical to have a complete list of all drivers, including family members and relatives who are members of the insured’s household, who may be using the vehicles. Remember that family members include wards, adopted and foster children. Besides listing all of the operators in a household, it is also important to have the following information:
· Where permitted, each driver’s gender and marital status
· Each driver’s name, date of birth, and driver's license number
· The vehicle operated by each driver (on a primary and secondary basis)
· Each operator’s motor vehicle record:
— Are there any accidents or violations
— Frequency of infractions
— Severity of infractions
· Each driver’s level of experience
· The existence of any driving restrictions
· The reasons for any driving restrictions
· Where applicable, each driver’s occupation
The above factors are typically the minimal information required to fully evaluate a personal auto exposure. An underwriter must be certain to gather additional information if applicable for youthful and senior operators.
New drivers are a tremendous concern for insurers, causing losses that are disproportionate to their numbers. When underwriting such drivers, it is helpful to have indications of greater maturity or driving knowledge.
Related Article: Youthful Operator Driver’s Safety Agreement
On the other end of the driver spectrum, greater care is also involved with underwriting senior operators. Although such drivers are very experienced, problems may eventually develop from deteriorating driving skills. Increased age is accompanied by various factors that can affect driving ability such as:
· Poorer vision
· Slower (reflexes) and joint mobility
· Poorer hearing
· Physical afflictions
Underwriters must take special care when considering additional information such as medical questionnaires or physician statements. While advanced age may be a valid underwriting concern, there must be a good reason for requesting and/or using sensitive information. It is not proper to select against an operator merely due to age. However, it is proper to carefully evaluate evidence of a failing ability to safely operate a car under normal operating conditions. When underwriting older drivers, it is also important to consider positives such as an older driver’s willingness to reduce their driving exposure such as avoiding night driving or long-distance trips.
A driving household’s loss and violation history is critical for underwriting a personal auto account. Loss history should include the date, time of day, driver, vehicle identification, description of the accident or loss, and the final amount of the settlement. Claims frequency and severity are not always clear-cut indicators of eligibility. Developing adequate information is important!
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Examples: |
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Loss History Item |
Clear-cut? |
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A severe (catastrophic) loss? |
There’s a big difference between it being an at-fault collision and an uninsured motorist claim. |
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Four tickets in three years? |
What if they were for illegal parking instead of speeding? |
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A couple of thefts from a vehicle? |
What if they happened at a previous address at an apartment complex and the insured now keeps the car in their single-family residence’s locked garage? |
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A ticket for traveling at an excessive speed? |
What if the person was taking their seriously injured child to a nearby emergency room? |
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Four drivers, two vehicles and only one ticket in the household? |
What if the single ticket is a month old reckless driving conviction? |
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The single driver’s only violation is a routine speeding violation? |
What if it happened the day before the person applied for coverage and failed to disclose it? |
The above situations show that there can be numerous areas of uncertainty. With violations and driving history, appearances can be deceiving, so more information usually means better underwriting decisions.
Another important topic to consider in any underwriting evaluation of the PAP program is the need for deductibles. The Personal Auto Policy uses deductibles for Damage to Your Auto Coverage, which includes Collision and Other Than Collision coverage. Typically, deductibles are identical for all vehicles written on the same policy that carry physical damage coverage. Deductibles can be used to help control losses, but, in personal lines, this tool is restricted to auto accounts that have a loss frequency problem. The frequency has to involve minor losses in order to be effective. Deductibles under the PAP program are too small to either control larger losses or create more attractive accounts. These goals are typically accomplished by deleting coverage For Damage to your Auto (in absence of a loss payee or leasing interest).
Deductibles may be used to reduce the cost of insurance. Most insurance companies provide a premium credit based on the size of the deductible. The insured is responsible for the losses that are under the deductible and the insurer responds only to the portion of loss that exceeds the deductible. Considering the point made earlier about the increase in the values of autos perhaps insurers should revisit their stance on deductibles.
Today’s sharing economy has created other vehicle use situations that deserve underwriting scrutiny such as ride-sharing and Transportation Networks.
Related Article: Car Pools and Personal Auto Policy Coverage
The nature of the Personal Auto Policy is broad. Therefore, underwriting considerations must include whether all the basic policy coverages are necessary for a specific insured. At other times, the PAP may not be broad enough. In such instances, the policy may be endorsed to add wording or eliminate exclusions in order to broaden coverage. This policy activity may result in additional premium at the discretion of the insurer.
Related Article: Personal Auto Policy Endorsements