... FOR ACCIDENTS THAT HAVE NOT HAPPENED.
The use of computer models to justify Premium increases is rampant. The increasing use of computer models to justify Catastrophe Premium Increases for Homeowner's Insurance and Property Insurance has been commented on for years. See, for example, the articles posted here on April 16, 2012, December 7, 2011, and June 29, 2011, and the many links in them to other sources as well.
The use of computer models to justify Automobile Liability Insurance Policy Premiums has begun. As in the case of Hurricane Damage and other Catastrophes, the database does not include -- as in not any longer -- evidence of actual occurrences and events. Instead the computer claims model is premised on assumptions. When such computer claims models are used in the context of increased Premiums for Homeowner's Insurance in Florida, for example, the "Garbage In, Garbage Out" ("GIGO") database consists of predicted future Hurricanes with the intensity of Hurricane Katrina and does not include actual payouts for actual covered storm damage caused by a Hurricane Isaac, if any.
In the case of Automobile Liability Insurance, the computer database does not include accidents that have actually happened, but includes instead predictions about accidents that have not happened. See David Sirota, "Big Brother in Your Car" (posted Friday, September 7, 2012)(©2012 Creators.com).
Automobile Liability Insurance includes an added factor in the Premium equation. Automobile Insurance is mandated by State statutes throughout the United States. Auto Liability Insurance Companies have a built-in competitive advantage over many other Insurance Companies offering other lines or types of Insurance, thanks to State Governments. In that view, then, it is appropriate for the same State Governments which mandate Auto Liability Insurance, to refuse to allow Auto Liability Insurance Companies to base their Premiums on losses that never occurred and on accidents that have not happened.
At the same time, there is a larger question reflected by this particular development in one field of Insurance Premiums. To say again, the use of computer models to justify Premunium increases is rampant. Computer models are increasingly used to justify any and all lines or types of Insurance: Catastrophe Coverage including Coverage for losses caused by Hurricanes in Florida and by Earthquakes in California, Homeowner's Insurance losses in Texas and Property Insurance losses in New York, and now Automobile Liability Insurance anywhere in the U.S.
That is the real story, I think. Practitioners, purchasers and underwriters of Insurance will either deal effectively with computer claims models used to support increased Premiums, and which are no longer based on actual, actuarial evidence but which are instead based on assumptions, or they will confront higher Premiums for all lines of Insurance. No other choice appears.
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