Date: 02/24/2009
Final
Insurance Industry
HOUSE COMMITTEE ON BUSINESS AFFAIRS AND LABOR
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12:46 PM -- Insurance Industry
The committee was called to order by Vice Chairman Casso. Ellen Poole, Assistant Vice President of Government Relations, United Services Automobile Association, advised the committee that she and her panel would be talking about automobile insurance claims. She introduced Mike Hyland from State Farm Insurance, David Jenkins from Allstate Insurance, and Gary Schultz from the United Services Automobile Association.
12:49 PM -- Mike Hyland, representing State Farm Insurance, talked about bodily injury claims. He gave the example of an auto accident where a driver, the policyholder, runs a red light and hits another car. Mr. Hyland said if the driver who was hit files a claim against the policyholder, the insurance company will begin by contacting the policyholder and discussing the accident with him or her and will attempt to establish fault. If the driver admits to running the red light, his or her insurance company will pay the medical bills of the claimant. Mr. Hyland explained that the process is more complicated if the driver needs long-term medical care. He said the next step in the process is when the policyholder's insurance company attempts to reach a settlement with the claimant. Mr. Hyland mentioned that it is very rare that claims go to litigation. Once a settlement is accepted by the claimant, the insurer will notify the policyholder. Representative Soper asked whether claimants tend to go after more money if the person at fault has additional insurance and more money available and how they stop that from happening. Mr. Hyland explained that the insurance company tries to only pay claimants what is owed.
12:56 PM -- David Jenkins, representing Allstate Insurance, talked about physical damages. He talked about how vehicles are inspected after an accident and who inspects them. Mr. Jenkins said the goal of the insurance company is to bring the vehicle back to its pre-loss condition as quickly as possible. Mr. Jenkins talked about the industry standards they follow for repairs, including recommendations from the manufacturers and independent research companies. He explained that determining whether to repair a car or to total a car is an economic decision. Mr. Jenkins talked about the resources that are used to determine how much a car is worth, including the Kelly Blue Book and the newspaper and explained that insurers try to find the closest match to the car.
01:01 PM -- Gary Schultz, representing the United Services Automobile Association, talked about rates and how accidents affect them. He explained the rate making equation and that it is an attempt to predict the future. In order to determine premiums, the insurance company takes the expected losses and the expenses associated with doing business for the upcoming year. The insurance companies use past trends to predict future costs. Mr. Schultz stated that underwriting losses and gains are based on how well you predict the future. He gave the example of a company that looked at past trends and determined that it will need $100 in premiums for the following year to cover the projected expenses of the 10 people the company insures. Mr. Schultz said that the company could have everyone pay $10 dollars, but what if one person is 16 years-old and one is 45 years-old and has never had an accident? He said the 16 year-old should pay more because past trends show that they are known to have more accidents. He also explained that if you have an accident, you are more likely to have another one. So in response, the insurer charges the person who has had an accident more than a person who has not had an accident. He explained that they charge the person extra for about three years when the likelihood of the person having another accident goes down. Mr. Schultz explained that the additional money insurance companies collect after an accident does not cover the loss from the accident, but goes to the predicted costs for the upcoming year. He stated that the automobile insurance market is very strong and competitive in Colorado which gives the insurance industry an incentive to set accurate premiums. This is because the insurance company either sets premiums too high and becomes uncompetitive, or the insurance company sets them too low and they lose money.
01:07 PM
Representative Balmer asked about credit scores and whether any of the companies present at the hearing use them. Mr. Schultz stated that they do use them because they are highly predictive and if they were not highly predictive, they would not use them because using credit scores is very controversial. Representative Soper asked about the money that is left over after premiums are taken in and expenses are paid out that are placed in a rainy day investment. Ellen Poole responded and explained that those investments were normal in the 1990s, but there have been many changes since then that have resulted in sophisticated underwriting. She said that since the stock market crash in 2001, the reliance on these investments have dropped.