Study 6: Underwriting the Risk: Automobile - Summary

Question 1

Automobile insurance is the most heavily regulated line of p&c insurance in Canada. Two common features of auto insurance regulation:

Answer 1

• The policy forms for automobile insurance are government approved.
• Compulsory insurance laws make it mandatory that every automobile owner have access to insurance.

Question 2

Necessity of auto insurance in Canada

Answer 2

• Auto insurance is mandatory for all vehicle owners in Canada
• In provinces with government auto insurance (British Columbia, Saskatchewan and Manitoba), access to basic insurance is assured by Crown corporations
• In other provinces, access is provided by a facility association, which covers risks unable to obtain coverage in the regular market

Question 3

Underwriter’s skill and judgement

Answer 3

• Despite auto insurance being heavily regulated, underwriters must still apply skill and judgement within boundaries set by regulation and the insurer’s own corporate philosophy
• Ex. Two parents with a child purchase a third car. The underwriter knows the parents each already have a car, and the child just obtained their license. The third car is most likely for the child and they should be listed as a primary driver
• Underwriters should also understand new technologies and decisions that are made automatically in order to respond to them

Question 4

Three rules in an insurer’s automobile underwriting manual which the underwriter should understand

Answer 4

• the type of car that an applicant wants to insure;
• the location of the applicant’s home; and
• whether or not the applicant plans to commute to work by car and the distance if he or she does.

Question 5

The registered owner, the actual owner, and the drivers

Answer 5

• The registered owner may not be the actual owner of the vehicle, which could raise the question of insurable interest as well as a potential moral hazard (i.e. the actual owner could be financially unstable and trying to disguise their ownership)
• Who will actually be driving the vehicle is critical - greatest exposure to loss will occur when the vehicle is being driven

Question 6

Seven questions to determine how a commercial applicant hires its drivers

Answer 6

• Does the applicant require prospective drivers to complete application forms?
• Does the applicant interview its prospective drivers before hiring them?
• Are references checked?
• Does the applicant administer written and road tests to prospective drivers?
• Are copies of operators’ licences kept on file?
• Are credit reference checks undertaken where the applicant’s drivers own the vehicles they operate?
• Is there a driver training program?

Question 7

Importance of determining owners and operators for commercial risks

Answer 7

• Financial health of owner ensures operation of vehicles safely (ex. vehicles are maintained, number of hours driven is not excessive)
• Properly trained drivers operate more efficiently, use less fuel, inflict less wear and tear
• Underwriter should obtain an MVR for both commercial or personal risks on all drivers who will be using the vehicle. Helps determine convictions or accidents from past three years.

Question 8

Driver experience

Answer 8

• Important to know the length of time the driver has been licensed, particularly in Canada
• Drivers licensed outside Canada may be more familiar with different driving conditions, laws, and rules of the road (ex. a driver from Australia would be familiar with driving on the left, different climate)
• Age and experience of driver should be compared against the type of vehicle (ex. an 18 year old driver purchasing a sports car may require additional questioning)

Question 9

Three questions an underwriter should ask if the driver’s lack of experience can be attributed to age

Answer 9

• Is this a brand-new driver who just obtained his or her licence? Younger and less experienced drivers are generally more likely to have accidents.
• What class of licence did the new driver receive, and was it issued as part of a graduated licensing program? A graduated licence can tell an underwriter a great deal about how much—or how little—experience the driver has.
• Did this new driver take a formal driver training program? If so, does he or she have a certificate to prove it? Many companies offer discounts when drivers have a driver’s training certificate (DTC).

Question 10

For any automobile insurance risk, the underwriter should be sure to do the following

Answer 10

• Review the automobile insurance application.
• Learn about the applicant.
• Identify the lessor or lessors of any leased vehicles.
• Examine the applicant’s relationship with the broker.
• Ask about the use of the vehicle.
• Identify the type or class of vehicle.
• Ask about any aftermarket modifications that might have been made to the vehicle or vehicles.
• Find out about any repairs that might have been made to the vehicle or vehicles.
• Identify and distinguish between the registered owner and the actual owner of each vehicle.
• For each vehicle, establish the driver’s age and investigate his or her Canadian driving experience.
• Look for some consistency between the age and other characteristics of a driver and the type of vehicle that he or she will be driving and for which insurance is sought.
• Investigate the maintenance planned for the vehicle or vehicles.
• Make the underwriting decision.

Question 11

Automobile application overview

Answer 11

• Underwriter should identify all persons who are to be insured
• If more than one person, the relationship should be determined (ex. are they a family or unrelated?)
• Corporation name and individual name should be specified if the applicant is a business
• Listing and verifying names can lead to interesting revelations (ex. an elderly woman who only needs a vehicle to run errands, but the vehicle is a pickup truck)

Question 12

Automobile application details

Answer 12

• The underwriter should start by determining whether the applicant for auto insurance is already a client for other lines (i.e. home insurance)
• This can provide the underwriter access to the client’s financial info
• If the applicant is a corporation, the underwriter should obtain financial information

Question 13

Credit history and auto insurance

Answer 13

• Rules about credit checks for auto insurance vary by jurisdiction
• Banned in Newfoundland and Ontario. Can be used in Nova Scotia, and in Alberta the client must give definite consent for a credit check to be done
• Credit history may indicate ability to pay premium. It can also indicate a commercial client’s ability to hire and retain responsible drivers and properly maintain automobiles

Question 14

Leased vehicles

Answer 14

• Coverage for leased vehicles is generally arranged by the lessee, since they have custody and control of the vehicle
• The leasing company may require higher liability limits and coverage for physical damage with lower deductibles
• Underwriter should get the names of both the owner of the vehicle (the lessor) and the driver (the lessee)
• Information about the lessor is also necessary - are they a well known leasing company? Do they use standard contracts?

Question 15

Vehicle maintenance

Answer 15

• Well maintained vehicles are less likely to fail the driver and be involved in an accident
• Maintenance questions are primarily asked for commercial risks, especially fleets.
• The underwriter will want to determine who is responsible for maintenance - an employee or a third party mechanic. A maintenance contract with a third party makes it more likely the maintenance schedule will be followed.

Question 16

Personal use, commercial use, and business use

Answer 16

• Personal use is broadly defined as using a vehicle for pleasure (ex. running errands, driving children to school)
• Commercial use is broadly defined as using a vehicle in the course of a commercial activity. May be private passenger vehicles used for earning profit (ex. Uber or Lyft, Ridesharing, etc.)
• Business use is broadly defined as combining elements of personal and commercial (ex. a sales professional who uses their personal vehicle for client visits)

Question 17

Six major automobile classes

Answer 17

• Private-passenger vehicles (pleasure, work, and business use)
• Commercial vehicles (trucks, delivery autos, and vehicles while being used for ridesharing)
• Public automobiles (buses and taxicabs)
• Recreational vehicles (motorcycles, snowmobiles, all-terrain vehicles [ATVs])
• Garage risks (road hazard and dealership risks)
• Non-owned automobiles

Question 18

Exposures posed by the use of a vehicle

Answer 18

• Kilometers per year
• Business or personal use
• Passengers
• Highway or city
• Vehicle for hire
• Personal or commercial
• Other vehicle use

Question 19

Kilometers per year

(Vehicle exposures)

Answer 19

• The more kilometers that a vehicle is driven each year, the greater the exposure
• Increased hybrid and remote work opportunities have lead to less commuting time. Insurers may need to revisit the definitions of commute and pleasure use.
• Insurance telematics (i.e. usage-based insurance) provides useful statistics on how operators use their vehicles, and costs can be customized to a driver’s driving habits

Question 20

Business or personal use

(Vehicle exposures)

Answer 20

Sales professionals often find themselves in unfamiliar areas when they go to visit a new client or prospect. When a driver is not familiar with the area, the possibility for loss is greater than if the territory is familiar.

Question 21

Passengers

(Vehicle exposures)

Answer 21

A real estate professional might carry prospective buyers in a car insured for business use, but he or she might also carry passengers in a car insured for personal use; for example, in a carpool arrangement. Whenever a vehicle carries passengers, there is a greater liability exposure.

Question 22

Highway or city

(Vehicle exposures)

Answer 22

All vehicles are more at risk in the city because of higher traffic volume.

Question 23

Vehicle for hire

(Vehicle exposures)

Answer 23

Insureds can receive compensation for gasoline or mileage from passengers in a carpool arrangement, but compensation for hire is typically excluded (ex. programs like Turo, where people rent a car directly from the owner)

Question 24

Personal or commercial

(Vehicle exposures)

Answer 24

A pickup truck can be used for personal use, but it may be involved in a trade or commercial operation. Attached aftermarket equipment may shed light on the use of the vehicle (ex. a snowplow attached to a truck in the winter)

Question 25

When looking at a commercial risk, the following considerations about use are important

Answer 25

• Stable industry: is the industry stable or dying? How long can they stay in operation?
• Seasonal or consistent use: applicant may be busy plowing snow in winter but idle all summer
• Use of vehicle: are they carrying goods or other items, and if so what are they?
• Equipment attachments: affects the uses of the vehicle and the type of damage that could be inflicted
• Vehicle storage: locked garage or parking lot? What is the protection?
• Transport of materials: explosives, chemicals, or hazardous materials?

Question 26

Other vehicle use

(Vehicle exposures)

Answer 26

Employers may ask employees to use their own vehicles in the course of operations (i.e. a pizza delivery person). The underwriter will want to ensure they have a non-owned automobile policy in place.

Question 27

The CLEAR System

Answer 27

• Canadian Loss Experience Automobile Rating (CLEAR)
• System for rating physical damage insurance, based on loss costs and passenger injuries
• Helps ensure that vehicle insurance premiums are commensurate with vehicle’s expected and actual claim experience

Question 28

Vehicles used to be rated based on the Manufacturer’s Suggested Retail Price (MSRP). This system is unfair because it ignores six important facts

Answer 28

• Most collision claims result in repair rather than replacement of the vehicle.
• Vehicle price is not the only predictor of repair costs.
• New technology makes cars smarter and safer. Automatic braking systems, lane–departure warning features, and self-parking vehicles make collisions less likely. Cars that have tracking technologies will be found easily if stolen.
• Vehicle price is not always the best predictor of claim frequency (that is, the likelihood of being involved in a claim) or severity (that is, the average claim cost).
• Not all vehicles depreciate at the same rate.
• Vehicles may exhibit different track records for different types of claim.

Question 29

Modifications to a vehicle

Answer 29

• The type or class of vehicle affects the exposure to loss the vehicle represents, and applies to the vehicle as it was made by the manufacturer
• Some owners have work done to their vehicles that make them significantly different than the standard manufacturer’s model
• This can affect the exposure to loss that a vehicle represents, and make it more expensive to repair

Question 30

Examples of vehicle customization

Answer 30

• An owner of a sport-utility vehicle (SUV) may install a heavy-duty off-road suspension package and big, knobby mud tires.
• A van owner may commission an artist to airbrush a scene on the side of the van.
• An owner of a compact car may install a powerful stereo system that may be worth more than the car itself.
• An owner of a vehicle may have a physical disability or may have a passenger who has a physical disability. Modifications may range from the simple addition of a steering wheel spinner knob to major modifications to the vehicle body structure, such as extending the body length and altering the roof of the vehicle to accommodate a wheelchair lift. Modifications in these cases can vary significantly in price.

Question 31

Repairs and unrepaired damage

Answer 31

• Underwriter should be alert to any damage repaired with aftermarket parts instead of those from the original manufacturer
• Should also be aware of any unrepaired or pre-existing vehicle damage and ask about it if not mentioned on the application
• If a client mentions there is existing damage, an inspection or photos may be required. Unrepaired damage makes a vehicle less safe and more likely to be involved in an accident

Question 32

Making the underwriting decision

Answer 32

Answers to an underwriter’s questions about an application will form a profile of the risk on which to base the decision. That profile will be compared against the insurer’s underwriting manual or line guide to help the underwriter decide on the risk.

Question 33

The underwriter can accept or reject a risk, but there may be alternatives that allow them to accept the risk. These include:

Answer 33

• A change in the applicant’s policies or procedures (ex. a commercial applicant who improves the procedures it uses when hiring drivers or implements a driver training program)
• A higher deductible (eliminates smaller losses that fall below the threshold)
• A higher premium (to offset potential loss experience)