# 14.1: Introduction

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Automobiles are an essential part of American society. In the beginning of the new millennium, there were approximately 156 million cars, vans, trucks, and sport-utility vehicles insured in the United States. The expenditures for auto insurance have declined in recent years, as shown in Table 14.1. Factors contributing to the decrease are safer cars, better safety devices, and less fraud and theft. These factors are somewhat diminished by overall increases in litigation and medical costs, as indicated in the private passenger auto insurance losses of Table 14.2 Insurance Information Institute (III), The Insurance Fact Book, 2009, 57, 62; www.iii.org/media/facts/statsbyissue/auto/ (accessed March 21, 2009).

Table 14.1 Average Expenditures on Auto Insurance, United States, 1997–2006
Year Average Expenditure Percentage Change Year Average Expenditure Percentage Change
1997 $705 2.0% 2002$786 8.3%
1998 $703 −0.3 2003$830 5.6
1999 $685 −2.6 2004$842 1.4
2000 $690 0.7 2005$831 −1.3
2001 $726 5.2 2006$817 −1.7

Source: © 2007 National Association of Insurance Commissioners.

Source: Insurance Information Institute (III), accessed March 21, 2009, www.iii.org.

According to the U.S. Department of Transportation’s National Highway Traffic Safety Administration, an auto accident death occurs, on average, every twelve minutes, and an injury occurs every eleven seconds. Vehicle occupants accounted for 74 percent of traffic deaths in 2007.Insurance Information Institute (III), The Insurance Fact Book, 2009, 136–137.

Drunk driving (driving while intoxicated [DWI] or driving under the influence [DUI]) contributes dramatically to fatalities on the road. In 2007, 12,998 traffic deaths were related to drunk driving. Most states have DWI or DUI laws that include lower blood-alcohol level tolerances for drivers under the age of twenty-one.Insurance Information Institute (III), The Insurance Fact Book, 2009, 72–74.

Table 14.2 Auto Insurance Claims Frequency and Severity for Bodily Injury, Property Damage, Collision, and Comprehensive, 1998–2007
Liability
Bodily InjuryExcludes Massachusetts and most states with no-fault automobile insurance laws. Property DamageExcludes Massachusetts, Michigan, and New Jersey.
Year Claim FrequencyClaim Frequency is claims per one hundred earned car years. A car year is equal to 365 days of insured coverage for a single vehicle. Claim SeverityIncludes loss adjustment expenses. Claim FrequencyClaim frequency is claims per one hundred earned car years. A car year is equal to 365 days of insured coverage for a single vehicle. Claim SeverityClaim severity is the size of the loss measured by the average amount paid for each claim.
1998 1.26 $9,437 3.97$2,240
1999 1.23 9,646 4.00 2,294
2000 1.20 9,807 3.98 2,393
2001 1.16 10,149 3.97 2,471
2002 1.15 10,400 3.92 2,552
2003 1.16 10,662 3.87 2,606
2004 1.14 11,079 3.78 2,624
2005 1.10 11,423 3.67 2,693
2006 1.03 12,020 3.49 2,811
2007 1.00 12,296 3.54 2,869
Physical DamageExcludes Massachusetts, Michigan, and Puerto Rico. Based on coverage with a $500 deductible. Collision ComprehensiveExcludes wind and water losses. Year Claim FrequencyClaim frequency is claims per one hundred earned car years. A car year is equal to 365 days of insured coverage for a single vehicle. Claim SeverityClaim severity is the size of the loss measured by the average amount paid for each claim. Claim FrequencyClaim frequency is claims per one hundred earned car years. A car year is equal to 365 days of insured coverage for a single vehicle. Claim SeverityClaim severity is the size of the loss measured by the average amount paid for each claim. 1998 5.39$2,273 2.93 \$1,078
1999 5.73 2,352 2.80 1,116
2000 5.61 2,480 2.89 1,125
2001 5.53 2,525 3.11 1,152
2002 5.48 2,728 2.91 1,250
2003 5.17 2,919 2.75 1,331
2004 4.88 3,073 2.45 1,420
2005 5.05 3,062 2.37 1,456
2006 4.88 3,189 2.39 1,529
2007 5.14 3,131 2.46 1,519
Source: ISO.
* For all limits combined. Data are for paid claims.

Source: “Automobile Insurance Overview,” Insurance Information Institute, accessed March 21, 2009, www.iii.org/media/facts/statsbyissue/auto/.

To alleviate the economic risk of getting hurt or hurting someone else in an automobile accident, the law in most states requires automobile owners to buy automobile insurance. In this chapter we will learn about the following:

2. The fault system and financial responsibility laws
3. Ensuring auto insurance availability
4. Types of automobile policies and the personal automobile policy (PAP)
In addition to understanding how the market conditions affect our risk management decision in the area of automobile insurance, the concepts we studied thus far will be helpful in quickly capturing the essence of auto coverage and the particulars of the wording in the policy. Here, we need to know not only what coverage we have but also what is required by the various state laws. You will have the opportunity to delve into an actual policy ("Appendix B") and complete your understanding of this important and costly risk. Figure $$\PageIndex{1}$$ connects this topic to our holistic risk puzzle. An example of the automobile coverage of the Smith family mentioned in "13: Multirisk Management Contracts - Homeowners" is provided in Case 1 of "23: Cases in Holistic Risk Management". The case shows how a family creates a complete risk management portfolio.