Personal Automobile and Commercial Automobile Loss Exposures: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 6, pp. 6.22-6.33.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-61-1. Myhr and Markham, pp. 6.22-6.23, discuss four types of residual market mechanisms. Name and briefly describe each type.

Solution S5-61-1. The following types of residual market mechanisms are discussed by Myhr and Markham, pp. 6.22-6.23:

1. Automobile insurance plans: These plans, also known as assigned risk plans, assign drivers to insurers who are members of the plan. Each insurer is typically required to accept the risks assigned to it.

2. Joint underwriting associations: "Joint underwriting associations (JUAs) operate as insurers. They appoint servicing insurers to handle all insurer functions. State law usually requires all insurers that write auto coverage to participate in a JUA. JUA profits and losses are evenly distributed among insurers based on their voluntary market share" (Myhr and Markham, p. 6.23).

3. Reinsurance facilities: This arrangement requires insurers to accept all applicants with a valid driver's license. However, for high-risk applicants, "the underwriter has the option of assigning the driver's premiums and losses to the reinsurance facility. The profits or losses on those policies are shared evenly among all insurers" (Myhr and Markham, p. 6.23).

4. State funds: This is a state-run organization that functions as a residual market insurer. It collects premiums, pays claims, and can be self-sustaining.

Problem S5-61-2.

(a) What are typical coverages required by no-fault automobile laws in some states? Give two examples.

(b) How might an injured party's right to sue be affected by no-fault automobile laws in some states?

Solution S5-61-2.

(a) The following typical coverages required by no-fault automobile laws in some states are discussed by Myhr and Markham, p. 6.24:

1. First-party medical coverage for automobile accident victims;
2. Loss of earnings coverage for automobile accident victims;
3. Survivors' benefits;
4. Funeral benefits;
5. Payment for replacement services required by the injured party.

Any two of the above answers suffice. Other valid answers may be possible.

(b) Some restrictions on the insured's right to sue are a result of many no-fault automobile laws, which are intended to reduce lawsuits arising out of automobile accidents. Some states allow insureds to waive their rights to sue in most circumstances, in exchange for a lower premium (Myhr and Markham, p. 6.23).

Problem S5-61-3. List five factors commonly considered by underwriters in evaluating personal automobile loss exposures.

Solution S5-61-3. The following factors are mentioned by Myhr and Markham, p. 6.25:

1. Age of operator;
2. Age of automobile;
3. Type of automobile;
4. Automobile use;
5. Driving record;
6. Territory;
7. Gender;
8. Marital status;
9. Occupation;
10. Personal characteristics;
11. Physical condition of driver;
12. Safety equipment;
13. Credit-based insurance scores (used by many insurers - but highly controversial).

Any five of the above answers suffice. Other valid answers may be possible, depending on the practices of specific insurers.

Problem S5-61-4. The following questions pertain to commercial automobile loss exposures.

(a) Why is considering the weight of the vehicle particularly important for commercial vehicles?

(b) The ISO Commercial Lines Manual (CLM) separates trucks and tractor-trailers into three categories based on their use. What are these three categories, and what are the criteria for membership in each?

(c) Which of the categories in part (b) receives the lowest rate? Which receives the highest rate? Why?

(d) Give three reasons for why tucks operated over longer distances may have more severe accidents than locally operated trucks.

(e) Myhr and Markham, pp. 6.31-6.32, discuss seven special industry classifications, or secondary classifications, of commercial vehicles. Name and define four of these classifications.

Solution S5-61-4.

(a) Considering the weight of the vehicle is particularly important for commercial vehicles because many commercial vehicles are extremely heavy - such as large trucks and tractor-trailer rigs - and often travel at high speeds. If an accident occurs, these vehicles are more likely to cause severe damage. Larger vehicles are also harder to navigate in heavy traffic or on small streets; this increases the likelihood of loss (Myhr and Markham, p. 6.30).

(b) The three categories in the ISO CLM are as follows:

1. Service use: This category describes "vehicles that are used principally to transport personnel or material to job sites. These vehicles are often driven to job sites at the start of a shift and remain there until the shift is over" (Myhr and Markham, p. 6.30).

2. Retail use: This category describes vehicles that are "used primarily for deliveries to and pickups from households" (Myhr and Markham, p. 6.31).

3. Commercial use: This category describes vehicles that are classified as neither "Service use" nor "Retail use".

(c) Service use vehicles receive the lowest rate, because they are typically driven to the job site and remain there until the end of the applicable shift; this means that they are used less during the course of the day. Retail use vehicles receive the highest rate, because they are typically driven throughout the day, along unfamiliar routes, and on demanding schedules.

(d) The following three reasons are given by Myhr and Markham, p. 6.31:
1. "A driver who operates a truck over long distances might not be as familiar with the route and its hazards as are drivers who operate trucks locally."
2. "Long-distance driving is more likely to be more strictly scheduled. If drivers are rushing to meet a delivery deadline, resulting fatigue and excessive speeds can increase accident frequency."
3. "Because long-haul trucks are large and usually travel at high speeds, they are typically involved in more severe accidents than trucks used within a city or town."

Other valid reasons may be possible.

(e) The following special industry classifications are described by Myhr and Markham, pp. 6.31-6.32:

1. Truckers: "Vehicles used to transport the goods or materials of others; this does not include moving household goods, office furniture, or fixtures and supplies."

2. Food delivery: "Vehicles that wholesale food distributors and food manufacturers use to transport raw and finished products."

3. Specialized delivery: "Delivery vehicles such as armored cars or autos for delivering film, magazines or newspapers, mail and parcel post, and similar items."

4. Waste disposal: "Vehicles transporting waste material for disposal or resale."

5. Farmers: "Vehicles owned by farmers and used in farming operations."

6. Dump and transit mix trucks and trailers: "Vehicles that have no other appropriate classification and that have an incidental dumping operation."

7. Contractors: "All vehicles used by contractors, other than dump trucks."

Any four of the above items suffice as answers.

Problem S5-61-5. Give three examples of useful information that an insurer can gather from a loss control report pertaining to commercial automobile loss exposures.

Solution S5-61-5. The following examples of useful information are discussed by Myhr and Markham, pp. 6.32-6.33:

1. The policyholder's accident record;
2. Small losses that are not directly reported to insurers because of high commercial automobile deductibles;
3. Frequency of theft and vandalism losses;
4. Location of losses.

Any three of the above answers suffice. Other valid answers may also be possible.

See other sections of The Actuary's Free Study Guide for Exam 5.