Is Accident Forgiveness Ethical?

From the perspective of insurance marketing, accident forgiveness is understandable: it sells insurance—more precisely, it tends to maintain an insurer's present roster of policyholders and to attract new insureds who are unhappy with their present insurers. But for anyone who truly believes in the fundamental principles of insurance and of ethics, accident forgiveness is unforgivable.

Let us begin with the core notion underlying accident forgiveness: the insurer will not raise the premium rates of an insured who is involved in an at-fault accident. Each insurer that offers accident forgiveness specifies how many and which types of at-fault accidents it will forgive. Premium rates may increase for other reasons, but accident forgiveness lowers the premium rates poor drivers would otherwise have to pay. Accident forgiveness—which comes in two basic forms, "free" and "pay-in-advance"—is an important element of the following scenario.

Our Scenario

Lillian Dresser was running late for work. Last night's snowstorm didn't leave behind enough accumulation to impede the morning rush hour. She decided to take County Line road to avoid any jams on the freeway. Now, with little traffic to worry about, Lillian picked up her speed and then her cell phone. She just had to tell Anne about her hot date last night at Baxter's.

A second motorist, Jeff Collingsworth, could barely keep his eyes open. This was the third straight night he worked overtime and the 12-hour shifts were killing him. He pulled his Honda out onto County Line road grateful that the snowstorm came up short last night. The road was pretty clear and he was driving just 5 miles over the speed limit to get him home and in bed within 15 minutes.

Johanna Johnson, our third driver, set her cup of hot coffee down in the cup holder. At the stop sign, she took off the lid and managed to get two of the three creamers into the cup. Turning left onto County Line road she knew she could get the third creamer and the sugar into her coffee before reaching the stoplight at Central Avenue. The traffic on County Line was usually light; her morning "caffeine fix" was just moments away.

The timing of the stoplight at the intersection of Central Avenue and County Line road is electronically monitored to meter traffic between the usually voluminous traffic on Central and the typically lesser cross-traffic on County Line. Johanna was busy stirring her coffee as she approached the red light. She slowed down, but tried not to stop, as she knew the light would soon turn green and the glassy road may still be slick from last night's snowstorm. Behind her, Johanna noticed Jeff's car weave a bit onto the shoulder, but he too, was slowing down, anticipating the still-red light would soon turn green. Johanna took a sip of her coffee then went to accelerate through the stoplight when she realized the light remained red longer than usual. Johanna hit the brakes, dumping her hot coffee into her lap. Her hands immediately went down to her burning thighs, releasing the steering wheel. Her foot came off the brake pedal. Johanna's car lurched then skidded sideways into the intersection.

Jeff had just enough room to avoid her slide, but he was too tired to react, and instead his Honda slid into Johanna's passenger door. The impact was enough to set off his air bags. Both cars were now sideways in the middle of the intersection. The traffic on Central Ave stopped; the light on County Line tuned green. Lillian was busy telling Anne about how good a dancer her date had been when she noticed the green light at the intersection and pushed her speed to make the light. It wasn't until she was much closer that she saw the two cars in the intersection had hit each other and were not just slowed traffic on Central Ave. Lillian dropped her phone and put on her brakes, but it was too late. Jeff's car was broadsided on his passenger side. Lillian's air bags also deployed from the impact.

Fortunately, no one was injured, but all three drivers were partially at fault: Johanna for not paying attention to the traffic light, Jeff for being too tired to drive alertly, and Lillian for allowing her phone conversation to distract her from traffic conditions. The three-car accident blocked all traffic coming through the intersection, causing an hour's delay in both directions. The police cited all three for careless driving.

Johanna, Jeff, and Lillian had different automobile insurance arrangements, each with a different insurer:

• Johanna, who until now had a clean driving record, was covered by Insurer A. Being a naturally cautious person, Johanna had purchased the accident forgiveness endorsement offered by Insurer A, even though she had thought at the time that this endorsement seemed rather "pricey."
• Jeff was a new auto insurance customer with Insurer B, which had offered him a free accident forgiveness endorsement to earn Jeff's account. Due to Jeff's adverse accident record, Jeff's premium rate had increased significantly with his previous insurer. The agent for Insurer B seemed willing to overlook the accident record that Jeff had accumulated, which greatly lowered Jeff's new premium.
• Lillian was insured with Insurer C, which did not offer accident forgiveness on any basis. So her auto insurance premium rates had been creeping up slowly over the years as she had been involved in two minor "fender-benders" and had gathered a few "points" on her license for speeding.

Violating Insurance Principles

Since the first day of our insurance careers, we all learned a fundamental principle: For insurance to work in the long run, premium rates must be:

1. adequate
2. reasonable
3. not unfairly discriminatory

In everyday language, this means that rates must:

1. be high enough in the aggregate to cover the insurer's claims, operating expenses, and profits or additions to surplus;
2. not be too high overall so that the insurer's underwriting profits remain reasonable;
3. discriminate fairly among insureds by charging premiums rates that accurately reflect the differing loss exposures that insureds bring to the insurance enterprise.

In our present scenario, Insurers A and C seem to be trying to follow this basic principle, but in significantly different ways. Insurer A sells Johanna an accident forgiveness endorsement, but for a "price." That price, reduced to its present value, hopefully equals the average of the extra premiums that this insurer would have collected if the insurer charged each insured traditionally—that is, charging a higher premium for each at-fault accident incurred. If this equality is not achieved, the insurer risks reducing its overall premium income, jeopardizing its financial soundness.

Viewed somewhat differently, the additional revenue the insurer collects by charging for accident forgiveness should, in the aggregate, bring to the insurer the same added revenue the insurer loses by not charging higher premiums to insureds whose accident records are poor. However, if this "price" for accident forgiveness is an average, then Johanna—having a clean driving record—probably is being overcharged for her piece of forgiveness. Other, less cautious, drivers are likely to have more frequent, more severe accidents to forgive. So Johanna will probably be subsidizing the higher price they should be paying for their forgiveness.

Insurer C is trying to apply the basic principle that all rates should be adequate, reasonable, and fairly discriminatory. On principle, Insurer C is simply shunning all forms of accident forgiveness and sticking to the traditional ways of rating automobile insurance. Tradition is not perfect here, but it is a firmer foundation than the slippery slope of accident forgiveness.

To get an idea of how slippery this slope can become, consider the position of Insurer B, which offers Jeff and other drivers accident forgiveness at no extra charge. If Jeff and the other relatively poor drivers whom Insurer B attracts with its free accident forgiveness do not soon become safer drivers, then—other things being equal—this insurer's premium income will be inadequate to pay its automobile policyholders' covered losses. ("Other things being equal" here means that the insurer's investment income does not rise, nor do its operating expenses fall, by enough to keep the Insurer B's premium income adequate to pay its rising insured losses.)

To maintain the overall sufficiency of its premium income, an insurer like B that just gives away accident forgiveness is likely to be forced to raise every automobile insured's premiums. This result is not only unfair to those original insureds who were (and probably remain) safer drivers than Jeff. These premium increases will also probably send Jeff and other policyholders of Insurer B like him out once again in search of any other short-sighted insurers that are still willing to give away free accident forgiveness. Thus, the cycle of (1) overall premium inadequacy and (2) inequity among the policyholders of insurers that offer free accident forgiveness is likely to continue to spiral downward.

Insurer B's offer of free and complete accident forgiveness makes clear how forgiveness violates fundamental insurance principles. To the extent accident forgiveness is not complete—that is, where an insurer forgives each insured only a limited number of some at-fault accidents—the adverse effects of accident forgiveness are reduced in dollar terms. But the violations of principle are just as real and just as unforgivable.

Violating Ethical Principles

Moving beyond the ways in which accident forgiveness weakens the financial soundness and fairness of a properly managed insurance company, accident forgiveness harms the interests, and betrays the trust, of many. Perhaps the two main groups who are in good faith expecting to benefit from accident forgiveness, but who actually suffer harm, are:

• The majority of insureds who, seeking reliable insurance at affordable premiums, actually see their rates increase and their coverage become less financially sound and less fairly priced.
• An insurer's stockholders or creditors hoping for reasonable profits on the capital they provide for the insurer's operations, who must tolerate rates of return below what they would have earned had the insurer collected premiums that met the traditional standards of adequacy, reasonableness, and fairness.

Even worse than jeopardizing these specific groups involved in the insurance mechanism, accident forgiveness unethically misleads the general public, which typically is unschooled in the finer technical points of insurance language. When 100 members of the public hear the word "forgiveness" in the phrase "accident forgiveness," surely at least 97 of them have visions of insurers suddenly becoming generous, abandoning previous wrongful rate increases for accidents that they now miraculously realize were "really no one's fault," and undergoing a general epiphany of gracious wisdom. Now is not the time to perpetrate "forgiveness" myths about automobile insurance that—when finally exposed, as ultimately they must be—will further tarnish our industry's current reputation.

Insurance is no more about forgiveness of statistically justified premium increases for insureds who have proven themselves to be bad risks than it is about pressuring or misleading policyholders who have legitimate insured claims into accepting inadequate indemnity payments. On the contrary, insurance is about people who earn honest and proper incomes by working or investing in an industry that provides a valuable product: known levels of financial security against the uncertainty of specified types of unpredictable losses. Myths about insurance—whether of forgiveness or of fraud—have no place in our industry.

At its most fundamental actuarial and ethical core, insurance demands a fair sharing of specified exposures to unforeseen accidental losses. Unless an insurer can, year after year, miraculously forecast precisely what to charge for it—and has the marketing courage to impose that added charge rather than giving it away free—automobile accident forgiveness exempts those insureds who actually cause the bulk of insured losses from bearing their fair share of the true cost of automobile accidents, thus unduly burdening those policyholders who remain relatively accident-free on our roads. This cannot be right.

^*Lisabeth A. Groller contributed greatly to the substance of this article.