October 17, 1997 NY TImes on the web Some Insurers to Increase Rates for Large Vehicles By KEITH BRADSHER [D] ETROIT -- Alarmed by research showing that sport utility vehicles and pickup trucks are inflicting unusually costly harm to cars and their occupants in collisions, some big insurers are raising liability rates on the oversize vehicles in what could amount to the largest overhaul of liability coverage since the rise of no-fault laws a quarter-century ago. To convince auto makers that such vehicles must be modified to make them less dangerous, the insurers are also bankrolling new studies and planning an ambitious series of crash tests. For motorists, the pocketbook effects of the overhaul of insurance rates could prove startling: a liability rate increase of up to 20 percent for drivers of sport utility vehicles and pickups over the next several years and a cut of up to 10 percent for car owners. That will likely mean an extra $50 to $700 a year in liability insurance payments for the first group, depending on current rates, and a savings of $25 to $350 for car owners. Two of the nation's largest insurers, Farmers Insurance Group and Progressive Corp., have already begun changing the way they calculate their rates. Executives at Allstate, Nationwide, Geico and USAA said they were reviewing the issue but were unlikely to make any decisions until they had more data, including broad studies by industry groups that will not be completed until next spring. Actuaries for Farmers and Progressive said that the reason for their rate moves was simple: Their customers who drive sport utility vehicles and pickups have been incurring unusually expensive claims to cover the damage and injuries they inflict during accidents. Rather than continuing to spread the extra cost among all drivers, including car owners, these insurers are starting to set rates accordingly. "It's pretty obvious the size and weight of these vehicles and the way they're built is contributing to the loss experience," said Jonathan Adkisson, an actuary at Farmers, a unit of BAT Industries and the nation's third-largest insurer after State Farm and Allstate. "When an accident occurs, the heavier vehicles are more likely to inflict damage and injuries, and these result in larger claims, so it seems appropriate to charge the drivers of those vehicles higher premiums." The biggest sport utility vehicles, like the Ford Expedition and the Chevrolet Suburban, weigh 5,200 to 6,000 pounds, while midsize sedans typically weigh 2,900 to 3,300 pounds. Sport utility vehicles also ride higher off the ground, so they tend to override the occupant protection features of cars and tend to have stiff frames that crumple the other vehicle in crashes. Liability coverage applies only to property damage and injuries caused to others by the policyholder. Rates for collision coverage, which applies to repairs of a policyholder's own vehicle, already take into account the fact that sport utility vehicles and pickups suffer less damage in crashes. Separate rates to cover the policyholder's injuries generally do not take into account the extra protection that these bigger vehicles provide to their occupants but are beginning to do so. But adjustments to this coverage offset only a small part of the extra liability cost. If the full liability rate increase goes into effect, drivers of sport utility vehicles and pickups will be paying substantially larger total insurance bills. Two groups in Washington, financed by most of the nation's insurers, are working on studies that will include six to 10 crash tests pitting sport utility vehicles against cars. The tests are partly intended to put pressure on federal regulators, who have repeatedly postponed such studies. Regulators have just begun planning six crash tests, which will begin this winter. Two crash tests already conducted in Europe by independent researchers found that sport utility vehicles, because of their height and weight, caused substantial damage to cars' passenger compartments. The insurers want auto makers to design vehicles that are more compatible in crashes, said Brian O'Neill, president of the Insurance Institute for Highway Safety and the Highway Loss Data Institute, the Washington groups conducting the studies. "We need the manufacturers to say, 'Wait a minute, what happens when the Ford Expedition hits the Ford Escort,' " he said. The controversy over the safety of air bags had distracted insurers until recently from the more important safety issue of sport utility vehicles, he added. Auto industry executives say they are constantly conducting research into ways to reduce the damage their products inflict -- indeed, Ford has long been Detroit's leader on many safety issues. But they also contend that some incompatibility is inevitable because Americans want a range of vehicle sizes. Helen Petrauskas, Ford's vice president for environmental and safety engineering, said that higher rates of seat belt use and reductions in drunken driving could yield greater safety gains than design changes in sport utility vehicles. While the number of very large sport utility vehicles is rising quickly, the likelihood that any single big sport utility vehicle will kill a car occupant is falling, according to new research by Ford. It attributes the improvement partly to greater use of seat belts and air bags, partly to better-designed cars and partly to a shift in who drives sport utility vehicles. Suburban families are increasingly replacing single men as owners. But what is particularly interesting about the Farmers and Progressive research is that unlike that of Ford, the insurers were able to take into account differences in driver age, sex, location and previous driving record. And what the insurers have found is further evidence of a safety problem: that the same driver will inflict considerably greater damage and injuries when driving a sport utility of almost any size than when driving a car. The industry research groups headed by O'Neill are conducting further studies. The safety institute intends to release a statistical study this fall of the death toll inflicted by sport utility vehicles and pickups. In a separate study next spring, the safety institute plans up to 10 crash tests. The data institute is drafting a third study, scheduled for release next April, that will look at insurers' costs to repair vehicles hit by sport utility vehicles and pickups. Kim Hazelbaker, the institute's senior vice president, who is overseeing the study, said that his initial computer data had already showed a significant problem that was likely to provoke industry action. The institute had earlier found that property damage liability costs for insurers from accidents involving large sport utility vehicles were 72 percent higher than for the average car. By contrast, property damage caused by large luxury cars was 19 percent below the average. The institute first studied the issue in 1994. But most insurers showed limited interest, Hazelbaker said, until sales of the biggest sport utility vehicles began surging a year ago and until a series of articles in The New York Times over the last seven months described the dangers that the bigger vehicles pose. Progressive actually began making slight adjustments to liability rates by vehicle model in the 1980s, and it has been moving to much larger adjustments over the last two years as the range of family vehicles on the road has widened. It now calculates liability rates based on a motorist's age, driving record and other variables and then increases the total by up to 20 percent for the biggest and most dangerous sport utility vehicles and pickups and by roughly 8 percent for smaller models. It subtracts 10 percent for the least dangerous car models. But Progressive has long been a maverick in the collegial insurance industry. Much more significant is the fact that before Farmers Insurance entered the Pennsylvania market last month, it quietly chose for the first time to file a rate schedule with regulators that adjusts liability premiums by vehicle model. The move by Farmers puts pressure on existing insurers in Pennsylvania to follow suit; their alternative is to risk losing car owners who could find a better deal at Farmers while being stuck with less profitable drivers of sport utility vehicles. It is not clear how fast competition will force insurers nationwide to adjust liability rates by model. Insurers have been reluctant to move quickly -- even Farmers has not decided to act in its more established markets. Calculating such rates can be expensive, requiring the training of agents and the reprogramming of computers. An insurer that imposes big rate increases for sport utility vehicles could also drive many customers to rivals that do not raise rates. Insurers, performing similar calculations to those Progressive has made, are likely to make comparable rate adjustments, as Farmers has already done in Pennsylvania. Adjusting rates by vehicle would be the biggest change in automotive liability insurance since no-fault laws became popular in some states a quarter-century ago, said Howard Cohen, vice president for actuarial research at Geico. No-fault laws tend to make liability insurance less expensive but do not eliminate it. Only one big insurer is actively hostile to adjusting liability rates by model: State Farm, the industry leader with 18.8 percent of the market. Dale Nelson, a State Farm actuary, said the insurer tracked its combined bodily injury and property damage liability costs by model and had found higher costs only for large pickup trucks, which it has not bothered to reflect in its rates. But State Farm's experience often differs from other insurers because it has an unusual number of older, rural customers. And Nelson's views offer little reassurance for car drivers: sport utility vehicles may actually save insurers money in a few accidents, he said, by killing people who might otherwise have survived with serious injuries. Severe injuries tend to produce larger settlements than deaths, he explained. The Allstate Insurance Group is more interested in adjusting liability rates. "What I would envision is a liability system that varies rates more finely by make and model," said Michael LaMonica, Allstate's vice president for automotive insurance pricing. The industry's trade groups are convinced that liability rates by model are almost inevitable. Sean Mooney, chief economist of the Insurance Information Institute in New York, said that the growing power of computers made it easier to calculate rates based on more variables and that competition forced insurers to use such calculations. Since the 1970s, insurers have been using vehicle model data to calculate rates for theft and collision insurance. Sport utility vehicles are so sturdily built and so heavy that they suffer relatively little damage in crashes, and this is reflected in generally lower collision rates for them. Because liability rates are not similarly adjusted, the overall cost of insuring a sport utility vehicle can actually be cheaper now than insuring a similarly priced car. Most insurers also do not adjust their rates by vehicle model for personal injury insurance, which covers some initial expenses for injuries suffered by a policyholder during an accident. Because occupants in sport utility vehicles and pickups suffer slightly fewer injuries in accidents, Farmers offers them a lower rate for this coverage in Pennsylvania and Progressive does so nationwide. But the reduction offsets only a small fraction of the higher liability rates imposed by those companies because personal injury coverage does not include pain and suffering payments or legal fees and thus is much cheaper than liability coverage. Only 40 percent of all insured motorists nationwide take personal injury insurance because it is required by just 13 states, including New York, and often overlaps with employer-provided health care policies. Rather than calculate liability rates by model, many insurers have been relying instead on rules of thumb that were developed decades ago. Allstate, for instance, gives a 10 percent discount on bodily injury and property damage liability rates for subcompact cars weighing less than 2,100 pounds because lighter vehicles do less damage in collisions. But Allstate does not charge extra for sport utility vehicles that weigh three times as much. The Insurance Services Office, which is owned mainly by 643 small insurers and helps them calculate rates, uses an equally outdated system. It has five broad categories based on the ratio of a vehicle's weight to horsepower, a system calculated in the 1970s to penalize sports cars that are lightweight but very powerful. But that formula now puts sport utility vehicles in the best category for liability insurance because of their weight. "The system just doesn't work anymore," said Chris Guidette, a spokesman for the Insurance Services Office, adding that the office plans to begin computer analyses soon to develop a better system. The question now is whether higher rates will affect the sale of sport utility vehicles. When insurers raised collision rates for so-called muscle cars in the 1970s, sales slumped. But buyers of sport utility vehicles are often so prosperous that they may not notice the extra cost. The typical Chevrolet Suburban buyer now earns more than the typical Cadillac buyer, while the average household buying a Range Rover or Lexus LX450 earns $360,000 a year. To leave the rates as is, however, could open the insurance industry to criticism, Mooney said. Flat liability rates tend to put an unfair burden on lower-income car drivers, who are in effect subsidizing the affluent owners of sport utility vehicles, he said. "That's an issue that we certainly have to look at," Allstate's LaMonica said. Copyright 1997 The New York Times Company