Car Insurance ...

Auto-Owners Insurance is a Fortune 500 company founded in 1916. It is headquartered in Lansing, Michigan and has over 65 full service and claims branches nationwide. Although the name suggests only auto insurance is provided, it actually provides many lines of insurance including property, liability, auto, garage, workers compensation, and life.

Auto insurance risk selection is the process by which vehicle insurers determine whether or not to insure an individual and what insurance premium to charge. Depending on the jurisdiction, the insurance premium can be either mandated by the government or determined by the insurance company in accordance to a framework of regulations set by the government. Often, the insurer will have more freedom to set the price on physical damage coverages than on mandatory liability coverages.
When the premium is not mandated by the government, it is usually derived from the calculations of an actuary based on statistical data. The premium can vary depending on many factors that are believed to have an impact on the expected cost of future claims

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. Those factors can include the car characteristics, the coverage selected (deductible, limit, covered perils), the profile of the driver (age, gender, driving history) and the usage of the car (commute to work or not, predicted annual distance driven).

Conventional methods for determining costs of motor vehicle insurance involve gathering relevant historical data from a personal interview with, or a written application completed by, the applicant for the insurance and by referencing the applicant's public motor vehicle driving record that is maintained by a governmental agency, such as a Bureau of Motor Vehicles. Such data results in a classification of the applicant to a broad actuarial class for which insurance rates are assigned based upon the empirical experience of the insurer. Many factors are deemed relevant to such classification in a particular actuarial class or risk level, such as age, sex, marital status, location of residence and driving record.
The current system of insurance creates groupings of vehicles and drivers (actuarial classes) based on the following types of classifications.
Vehicle: Age; manufacturer, model; and value.
Driver: Age; sex; marital status; driving record (based on government reports), violations (citations); at fault accidents; and place of residence.
Coverage: Types of losses covered, liability, uninsured or underinsured motorist, comprehensive, and collision; liability limits; and deductibles.
The classifications, such as age, are further broken into actuarial classes, such as 21 to 24 year olds, to develop a unique vehicle insurance cost based on the specific combination of attributes for a particular risk. For example, the following information would produce a unique vehicle insurance cost:
Vehicle: Age - 7 years old; manufacturer, model - Ford, Explorer XLT; value $ 18,000
Driver: Age - 38 years old; gender - male; marital status - single; driving record (based on government reports) violations - 1 point (speeding); at fault accidents - 3 points (one at fault accident); place of residence 33619 (zip code)
Coverage: Types of losses covered; liability - yes; uninsured or underinsured - no; motorist comprehensive - yes; collision - yes; liability limits - $100,000/$300,000/$50,000; deductibles - $500/$500.

A change to any of this information might result in a different premium being charged if the change resulted in a different actuarial class or risk level for that variable. For instance, a change in the drivers' age from 38 to 39 may not result in a different actuarial class because 38 and 39 year old people may be in the same actuarial class. However, a change in driver age from 38 to 45 may result in a different premium because the records of the insurer indicate a difference in risk associated with those ages and, therefore, the age difference results in a change in actuarial class or assigned risk level.
Current insurance rating systems also provide discounts and surcharges for some types of use of the vehicle, equipment on the vehicle and type of driver. Common surcharges and discounts include:
Surcharges: Business use.
Discounts: Safety equipment on the vehicle airbags, and antilock brakes; theft control devices passive systems (e.g. The Club), and alarm system; and driver type - good student, and safe driver (accident free); group - senior drivers fleet drivers.

Telematic systems ...
Conventional rating systems are primarily based on past realized losses and the past record of other drivers with similar characteristics. More recently, telematic systems have been introduced whereby the actual driving performance of a given driver is monitored and communicated directly to the insurance company. The insurance company then assigns the driver to a risk class based on the monitored driving behavior. An individual, therefore, can be put into different risk classes from month to month depending upon how they drive. For example, a driver who drives long distance at high speed in one month might be placed into a high risk class for that month and pay a large premium. If the same driver drives for short distances at low speed the next month, however, then he or she might be placed into a lower risk class and charged a lower premium.
Norwich Union is currently offering a type of telematic auto insurance in the United Kingdom called Pay as You Drive. This system employs a combination global positioning system (GPS) and cell phone in a car to monitor driving performance and communicate risk factors to the insurance company. Drivers are offered a discount if they exhibit safe driving. Trials conducted by Norwich Union in 2005 have found that young drivers (18 to 23 year olds) signing up for telematic auto insurance have had a 20% lower accident rate than average.

In the United States, Progressive Corporation is offering a form of telematic auto insurance to residents of Minnesota called TripSenseTM. The TripSense system consists of a black box that the driver plugs into their car's OBD-II port. The black box monitors the mileage driven, speed, time of day and other parameters, but not the car's location. The user then checks the black box once a month on their home computer. The home computer tells them if they qualify for a discount. If they do, they can download the information to the insurance company and get the discount. If they don't they do not have to download the information.
Other insurance companies are offering telematic auto insurance products in Germany, South Africa, and Japan.

Patented risk selection systems ...
New risk selection methods may be patentable to a greater or lesser degree depending upon the patent laws of various countries. These patents are generally described as business method patents. The United States is fairly liberal in granting business method patents. Europe is fairly conservative.
Different forms of telematic auto insurance, for example, were independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance us patent 5797134 and a Spanish independent inventor, Salvador Minguijon Perez EU patent 700009. The Progressive patents cover the use of a cell phone and GPS to track movements of a car. The Perez patent covers monitoring the car's engine control computer to determine distance driven, speed, time of day, braking force, etc. Ironically, Progressive is developing the Perez technology in the US and Norwich Union is developing the Progressive technology for Europe under a license from Progressive. Progressive does not have to get a license to the Perez patent since it was never filed in the US.

Principles of insurance ...
A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004. The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.