Risk management opportunities in auto insurance: A focus on the value of vehicles

Ratemaking and risk‐based pricing revolve around the value at risk, involving a tendency of higher values implying higher premiums. Traditionally, vehicle values are set at “list price” and depreciate over time on a one‐size‐fits‐all factor model. If values change over time, so should premiums, but a single factor table that only goes downward to flat is out of sorts with today. In today's transactional data streams, vehicle features, and values can be easily observed—of note, a shift in product mix that has more options and higher retained values creates a gap in actual versus traditionally expected insurance values. This gap most acutely appears at the vehicle “as built” level, which is more granular than current segmentation levels of insurance ratemaking vehicle valuation analysis. The result is leaving companies to simply raise base rates universally until they can adapt more flexible price‐to‐value methods at an “as built” price accuracy sophistication level.