Last Updated 1/26/2023
Issue: Auto insurance provides drivers and passengers financial protection from accidents or other vehicle-related accidental occurrences. It is a legal contract between the policyholder and insurer indemnifying against listed perils and risks within the specified policy term and coverage limits. Each state sets their own auto insurance laws, but most require a minimum level of auto insurance coverage. Vehicle owners frequently purchase auto coverages beyond the minimum amount set by the state. The premium vehicle owners pay to insurers to be insured reflects the policy’s level of coverage and risk factors.
Overview: Auto insurance is available for personal and commercial vehicle use. The insurance coverage types for these policies are much the same. However, there are some important distinctions. For this reason, personal auto policies typically exclude vehicles used for business purposes. Commercial auto policies typically have higher liability limits than personal policies. They also have provisions for rented vehicles, employee operated or owned vehicles, operation of heavy duty vehicles and transported goods or people.
Auto insurance premiums have historically been priced on underwriting and rating. Underwriting is a process where the insurer assesses the applicant’s risk. They do this by incorporating personal information and internal claims data into weighted algorithms. Insurers then look at rating factors to predict the likelihood of a claims submission. The rating assigns a price based on the projected cost to the insurer of assuming financial responsibility of potential claims. Auto insurance premiums fluctuate with the projected risk to the insurer. A policyholder can lower their premium by taking on more risk. For instance, the policyholder can choose to drop optional coverages or increase the deductible. A deductible is the out-of-pocket portion of the claim for which the driver is responsible.
The main rating factors for auto insurance are:
- Marital status
- Driving experience
- Driving record
- Claims history
- Credit history
- Previous insurance coverage
- Vehicle type
- Vehicle use
- Miles driven
- Coverages and deductibles
It should be noted recent innovations in mobility have shifted auto insurance needs and options. As a result, more consumers are taking advantage of ride sharing, car sharing and usage-based insurance (UBI). These innovations have begun to shift how some insurers price risk. For instance, UBI ties insurance costs to driving habits, such as miles driven, time of day and hard stops. Insurers offering UBI products may monitor how policyholders drive through telematics devices. More information on UBI can be found on the CIPR Telematics/Usage-Based Insurance topic page.
Drivers are required in most states to have a minimum level of liability coverage. There are two basic coverage areas for liability coverage: bodily injury and property damage. Most auto insurance policies also contain uninsured/under-insured motorist coverage. Some states also require a minimum amount of coverage for medical payments and/or personal injury protection (PIP). Auto policies may include property damage coverage for both collision and comprehensive coverage. These coverages are usually subject to a deductible. Although neither is mandated by state law, they may be required by a lender.
The primary coverage types in an auto policy are:
- Bodily injury: pays for costs related to another person's injuries when the driver is at fault
- Property damage: pays for damage done by the driver to another person's property while driving
- Uninsured motorist: pays for costs incurred by driver if injured by someone without auto insurance
- Collision: pays for damage to the driver’s vehicle from colliding with another vehicle or object
- Comprehensive: pays for damage to the driver’s vehicle for most other causes (fire, weather, theft)
- Medical payments: pays to treat the injuries of the driver and passengers
- PIP: pays medical payments, lost wages and funeral costs
- Excess Medical Payments: pays for medical costs exceeding PIP benefits
Status: Auto insurance is one of the most purchased insurance policies. Advances in technology and mobility are changing the auto insurance landscape. Consumers will need to understand new innovative insurance options, such as UBI. The NAIC’s DriveCheck assessment helps consumers determine if UBI may fit their driving habits. The self-assessment tool guides the consumer through driving habit questions to gauge his or her potential score under a UBI program. Additionally, as self-driving cars begin to take to our roads, consumers will need to understand their insurance implications.
Also available for consumers to download is the Consumer Shopping Tool for Auto Insurance. This document explains how to purchase auto insurance. It is maintained by the NAIC Transparency and Readability of Consumer Information (C) Working Group.
The NAIC produces the Auto Insurance Database Report, which provides average costs associated with personal auto insurance nationwide. It includes countrywide and state-specific data, including earned premiums, incurred losses, earned exposures and number of claims for both voluntary and residual market business. The report is maintained by the Casualty Actuarial and Statistical (C) Task Force and is updated annually.
The Big Data (H) Working Group studies what type of data is collected and how it is used by insurers and third parties in the context of marketing, rating, underwriting, and claims. This includes an evaluation of both the potential concerns and benefits for consumers and the ability to ensure data is being used in a manner compliant with state insurance statutes and regulations.
In June 2020, the Property & Casualty Insurance (C) Committee adopted the Private Passenger Automobile Study, which looks at state-by-state data and auto insurance affordability.
Committees Active on This Topic
Auto Insurance Database Report 2019/2020
Study on the Affordability of Personal Automobile Insurance
Federal Insurance Office, U.S. Dept. of the Treasury, January 2017
Rethink Your Auto Insurance Options
August 2017, InsureU
Usage-Based Insurance and Vehicle Telematics: Insurance Market and Regulatory Implications
March 2015, CIPR Study
Auto Insurance Affordability
May 2015, Journal of Insurance Regulation
A Shopping Tool for Auto Insurance
CIPR Event Explores the Future of Automobile Insurance
January 2014, CIPR Newsletter
NAIC releases 2019/2020 auto insurance report
NAIC News Release, February 2023
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