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Restrictions on auto insurance rating variables could shrink private coverage

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Restrictions on auto insurance rating variables could shrink private coverage

Taking away insurance companies' use of driver traits they factor in to set premium prices could shrink the insurable population and force the riskiest motorists into pricey, state-assigned pools, an actuarial researcher said.

Many states already restrict the personal "rating variables" that car insurers can use to determine which drivers are riskier and should pay higher premium rates and which should be considered safer and charged less. The past few years have seen more such restrictions proposed, including California's rule eliminating gender as a rating variable and a proposal on the federal level that would restrict the use of credit scores.

The Casualty Actuarial Society believes the trend threatens to reverse the progress private auto insurance companies have made in the past 20 years offering coverage for all drivers no matter their driving history. The rise in coverage followed the acceleration of the use of rating variables, which gave companies more insight and made them more willing to take on risks they previously considered uninsurable, said Ken Williams, an actuary with the society who co-authored a white paper on the topic with the Insurance Information Institute.

"They're willing to write it because they think they're going to get the right premium for it," Williams said in an interview.

Since carriers began extensive use of rating variables, the number of drivers whose histories previously made them uninsurable to underwriters has shrunk to a fraction of what it was, Williams said. For example, a DUI conviction was once a barrier to getting private-based coverage, but is much less so now, he noted.

In states that require car insurance, the only alternative for people whose driving histories prevent them from getting market policies is assigned risk pools, in which premiums are high and coverage is minimal. The number of drivers in assigned risk pools has declined to about 88,000 in 2017 from 827,000 in 2002 in the 45 states that report the number to AIPSO, the nonprofit organization that processes applications for state car insurance pools of last resort.

Premiums for that pool of motorists, called the residual market, are intended to be adequate for coverage but not competitive with the voluntary market, said John Verruso, the organization's director of communications. Aside from unfavorable terms of coverage, the other major factor in the decline in applications has been the sophistication of private carriers' underwriting, Verruso said in an interview.

"Risks that once they would not write, now they do," Verruso said.

Insurers that have variables such as gender eliminated by regulations will look for proxies in an attempt to substitute for them, Williams said. If states eliminate gender as a rating variable, but carriers still believe that men of a certain age are higher risk, they could look for a gender proxy such as charging higher premiums for pickup trucks, which men are more likely to drive, Williams said.

Other options available to underwriters are to make all drivers pay more to cover losses from riskier drivers, or to write fewer policies by again excluding some risk factors from coverage altogether, Williams wrote in the white paper.

However, Aite Group researcher Greg Donaldson predicted that the market will always seek to keep drivers on the voluntary insurance rolls, and he noted in an interview that the technology exists to help them do it. Taking away rating tools is more likely to increase the take-up of nonstandard policies, voluntary coverage for high-risk motorists but at higher premiums than standard policies, Donaldson said.

"There will always be some kind of force trying to convert whatever [actuaries] can find in the residual markets that's salvageable at all into a nonstandard policy," Donaldson said.

And P&C risk expert Brian Sullivan said regulatory tweaks to rating variables can warp pricing, but that only draconian measures are likely to drive consumers into the involuntary pools. California, for example, has for decades limited the rating variables carriers can use without adding to the residual market there, said Sullivan, editor of Risk Information Inc.

On the other hand, North Carolina's restrictions, among the country's most heavy-handed, have contributed to the nation's largest residual market, he added.

"Underwriting restrictions, unless they're North Carolina-style, can be worked around," Sullivan said in an interview.