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:
- adequate
- reasonable
- not unfairly discriminatory
In everyday language, this means that rates must:
- be high enough in the aggregate to cover the insurer's claims, operating
expenses, and profits or additions to surplus;
- not be too high overall so that the insurer's underwriting profits remain
reasonable;
- 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.