TIER RATING

TIER RATING: -

What is a Tier?

A tier is a rating level that is determined by a set of individual risk characteristics. Tier rating allows for an insurer to offer a wider variety of rates to different types of drivers with different risk characteristics and expected losses.

Tier Rating – History

In June 1997, state Legislators approved, and Governor Christie Whitman signed into law legislation that eliminated state mandated eligibility surcharges. Under the surcharge system it was not uncommon for drivers with minor violations to pay hundreds or even thousands of dollars a year in surcharges for a three-year period. The inequity in the surcharge system was that drivers with good, long-term driving records were subject to heavy penalties.

The new legislation provided that insurers use tier systems to determine rates. Tier rating systems look at much more than DMV violations. Insurers now consider a number of risk characteristics, including driving record, claims history, years of driving experience, number of years with the company, vehicle type and coverage limits when determining a driver's tier placement. Other factors, like age, gender, and marital status may also impact on an individual's rate within a specific tier. Companies began implementing their tier systems in October 1998.

How many tiers will a company have?

The number of tiers varies widely from company to company.

What is tier rating?

Reforms have been enacted which eliminate auto insurance company surcharges for motor vehicle violations and accidents. Instead of relying on just two rating levels (non-surcharged and surcharged), insurance companies will use tier systems to determine rates. Tier rating systems take the “complete picture” into account to identify a low risk driver rather than simply penalizing drivers for accidents and DMV violations. The result is that while accidents and violations can still impact your auto insurance premium, other risk characteristics will receive equal or greater weight in determining your premium.
Insurers examined the claim history, driving records and risk characteristics of all their policyholders to develop their particular rating levels or “tiers” for the many different types of drivers and vehicles they insure. The outcome is that auto insurance companies will now have a greatly expanded range of premiums that they can offer to customers.


Why have some people’s rates increased even though they have no points on their driving record?

Some people will see an increase in their premium because of tier rating, while others
will see a decrease. The tier rating law mandates that implementation of tier rating be “revenue neutral.” This means that an insurer cannot collect more in total premium from
their policyholders because of tier rating. However, the distribution of the premiums charged will change.

What factors are used to determine Tier placement?:-

The goal of any auto insurance rating system is to develop individual policyholder premiums that reflect each motorist’s likelihood of being involved in an accident or suffering a loss in the future. Rating systems are based on the fact that an individual driver’s potential for a loss (being involved in an accident, having a car stolen or being sued) is influenced by certain objective characteristics. Rating systems operate by assigning drivers to identifiable groups with similar risk characteristics.
The risk factors each company uses to determine tier placement will be different for each insurance company. Risk characteristics considered important to one insurer won’t necessarily carry the same weight with another. Insurance companies choose risk characteristics that are specific and objective and related to the risk involved. However following are some of the common factors normally used for Tier Placement: -

1) Credit Score
2) Age
3) Years of driving experience
4) Number of accidents in the experience period (normally either 3 or 5 prior years)
5) Number of violations on the Motor Vehicle record in the same period
6) Home or condo ownership
7) Vehicle type (regular, performance, etc)
8) Use of vehicle (pleasure, business, Commuting)
9) Limits liability limits on the policy
10) Was there continuous coverage before (no lapse?)
11) MVR.

The companies are changing to a new rating model that takes into account hundreds of tiers.

Underwriting Application of Tier Rating Factors:-

Insurers ran a MVR and Credit Score. Then they enter that information along with the rest of the underwriting info like car, location, coverage’s, etc. The program provided the different tier rating each insured was eligible for. Each carrier had their own criteria.

The factors selected by each insurance carrier will vary and those choices will be multiplied by what is allowed by state regulation. For example, California does not expressly forbid insurance carriers from using credit history in the rating algorithm, but the state has set the bar so high on burden of proof that companies are unwilling to make the attempt at using credit in their rating / underwriting practice. Generally, traditional factors like age of driver and driving record will be used to determine tier placement -- as will an individual's insurance bureau score (which is not a true credit score, ala FICO). Some carriers may not have the sophistication or systems to use credit history, but these days the number of companies taking this position is very small; most use credit in some form to help determine initial placement when the policy is first issued. Many states allow for initial tier determination on "new business" but restrict the use of re-tiering at renewal based on a change in credit standing -- unless the consumer / policyholder initiate a review.

Tier Rating - The Result

The result is a return to competition. Companies can now position themselves to compete for customers with the risk characteristics that they believe are the most favorable. Creativity and innovation will now be reintroduced to the system. Insured’s will now find price differences may vary widely between companies depending on his or her driving characteristics. Consumers now more than ever have an incentive to shop for better rates.

The bottom line is insurance premiums will now more accurately reflect the risk each driver represents. Good drivers get the best rates. Tiered rating is a step towards restoring a healthy and competitive insurance marketplace.