New Technologies Alter How Rates for Auto Policies Are Set

Computer technology and changing attitudes are transforming the way auto insurance is being priced--much to the chagrin of owners of sport-utility vehicles.

The new pricing systems represent a fundamental shift in the way insurance companies view SUVs, pickups and vans, whose owners typically have been charged the same premiums for liability coverage as those of smaller cars, even though the heavier vehicles often inflict more damage in crashes.

The change will lead to higher insurance rates for bigger vehicles and lower rates for smaller ones.

It also reflects insurers’ growing ability to comb their computer databases to find patterns that can affect the way insurance is priced, and their growing willingness to charge some drivers higher rates than others.

“This is part of a broad trend in insurance so that the price of insurance gets closer to the risk for each individual consumer,” said Brian Sullivan, an independent insurance analyst and editor for Laguna Hills-based Risk Information Inc., which publishes an auto insurance newsletter. “And that sounds fine to most people, until they’re the ones whose rates go up.”

An indication of the new trend emerged this week when two of the nation’s largest insurers, Allstate Insurance Co. and Farmers Insurance Group, said they will boost liability premiums for SUVs, vans and large pickups. The changes are expected to raise or lower individual premiums by $25 to $100 a year.

Auto industry analysts say the higher premiums by themselves won’t be enough to end the public’s love affair with SUVs, which now make up about 19% of U.S. passenger vehicle sales. But they are one more factor--along with higher gas prices, a slowing economy and growing awareness of roll-over risks--that could hurt SUV sales, analysts said.

The SUV market could have “one more rock, added to all the other rocks, weighing it down,” said Daniel Gorrell, analyst with San Diego’s Strategic Vision, a consumer research and consulting company.

Until recently, most insurers ignored differences between vehicles when pricing liability insurance, which covers damage and injuries an insured driver causes to others. The process of sorting through claims to find patterns wasn’t considered cost-effective.

As competition and higher claims costs have squeezed profits in recent years, however, auto insurers have looked for ways to contain their expenses and better price their policies, said Ira Zuckerman, auto insurance analyst with Nutmeg Securities.

Insurers were already using their computer databases to calculate premiums for collision coverage--which pays for damage done to the insured driver’s car--and comprehensive coverage, which pays for theft, fire, weather damage and other harm not caused by an accident. These types of claims are relatively easy to analyze. For example, cars that are more likely to be stolen generate more comprehensive claims.

Liability coverage, on the other hand, is more difficult to price because insurers must factor in not only physical damage to another vehicle but bodily injury to the other vehicle’s occupants. Since liability claims often take longer to settle and sometimes involve lawsuits, collecting the data can take longer.

As with comprehensive and collision coverage, insurers must also factor out variables that are specific to individual drivers, such as age, experience and miles driven, in evaluating a particular car’s potential to generate claims. (Once a vehicle has been rated, the driver-related factors are added back in to determine an individual’s insurance premium.)

Most insurers didn’t set up their computer systems to analyze liability data based on the types of vehicles involved. Only so-called nonstandard insurers, which specialize in insuring bad drivers and compete almost solely on price, designed their databases to determine which kinds of cars--and drivers--tend to have the most-costly claims.

Mainstream insurers, by contrast, had to build new databases that could fetch and analyze information from older databases--including some that were designed in the 1960s.

“It’s been very expensive to design the programs and extract the data and analyze it,” Farmers spokeswoman Kitty Miller said.

Seeing a pattern is different from acting on it, however. Some consumer advocates have accused insurers before now of being unwilling to impose greater costs on SUVs, for fear of alienating their wealthier customers.

Of course, not all insurers say they see the same patterns. Market leader State Farm Insurance, which has the largest claims database among insurers, has said repeatedly it is not planning to alter liability pricing. Chief actuary Gary Grant said State Farm’s database shows that the greater damage large vehicles do is offset by the fact that they are involved in fewer accidents. State Farm did recently lower medical coverage premiums for some SUVs and luxury cars, because it said its database research showed the vehicles better protected occupants in crashes.

Allstate, Farmers and others, however, say the pattern is clear: High-riding, heavier vehicles also cause more damage overall. In addition, these insurers believe consumers are becoming more willing to pay premiums that more precisely reflect their own situations.

The issue has particular resonance in California, where voters passed Proposition 103 in 1988 in an attempt to force insurers to place less emphasis on ZIP Codes and more emphasis on an individual’s driving record and miles driven in pricing insurance.

In essence, Proposition 103’s backers want insurers, when setting premiums, to focus less on where a person lives and more on how he or she drives.

Insurers have fought to retain ZIP Code-based pricing, and the issue is tied up in court, with a ruling expected this month.

But the type of liability pricing adopted by Allstate, Farmers and others is a move toward auto insurance premiums that better reflect individual risks, analysts said.

Allstate, the nation’s second-largest insurer, began implementing varied liability pricing last year in Oregon with 2000 model-year cars.

By Dec. 31, Allstate will add 2001 model-year vehicles in a total of 18 states, including California.

Farmers, which ranks third nationwide, will roll out its new pricing system next year, and has yet to decide whether it will include model years before 2001, said Kevin Kelso, head of Farmers’ auto insurance unit.

Analysts say it’s inevitable that other insurers will follow. Analyst Sullivan believes it’s just a matter of time before State Farm, in particular, follows suit.

“They’re definitely going down the same road,” Sullivan said. “They’re just getting there later than everybody else.”