Mixed Bag.

Gas-electric hybrid cars are here, and insurers are taking a wait-and-see attitude about how they will affect the industry.

The top five U.S. private-passenger auto insurers have a wait-and-see attitude about how two new hybrid autos, Honda's Insight and Toyota's Prius, will affect the auto insurance industry. "Hybrid cars are an interesting vehicle development. We need a period of time for loss costs to develop," said Scott Cummins, standard auto products officer at Nationwide Insurance. Hybrid cars contain combination gasoline-electric engines.

Hybrid cars represent another challenge for insurers, which over the years have had to deal with innovations such as air bags, seat belts, anti-lock brakes and advanced head restraints. This engineering change comes right after the two largest auto insurers, State Farm and Allstate, altered their pricing rules last year to more clearly reflect policy costs in response to larger, safer auto-body construction. In November, State Farm announced a new pricing policy for auto rates that gave discounts to drivers of vehicles based on claim experience in areas such as medical payments and personal injury protection. The new pricing policy offers a "vehicle safety discount" that replaces the company's "passive restraint discount" for cars with air bags or automatic safety belts. Allstate also is using a new pricing plan, called experience group rating, which is being implemented on a state-by-state basis for 2000 model-year vehicles and beyond. Allstate is pricing major auto insurance--liability, medical and physica l damage--to reflect claims experience for a vehicle's make and model. In the past, claims experience for make and model affected only the physical damage portion of the premium.

No Effect on Underwriting

The cars with the new hybrid engine, however, haven't had any effect on underwriting, according to the top five auto writers. Allstate, the No. 2 private-passenger auto insurer in the United States, bases its underwriting price on the Prius or Insight on list price. It charges a Prius owner the same premium as it would for a similar vehicle of similar cost. For instance, the Prius and Insight each cost about $20,000, so premiums are based on what other $20,000 vehicles are charged. State Farm also is basing its collision and comprehensive rates on the list price of each vehicle. "As we gain claim experience on the hybrid vehicles, we'll make any necessary rating adjustments," said Dave Hurst, a State Farm spokesman.

Hybrid cars have a parallel engine system in which a gasoline engine is joined with an electric motor to run the vehicle. The Insight accomplishes this with one motor, while the Prius has two motors under the hood. The new autos are being marketed as fuel efficient-they get about 50 miles per gallon--and the Insight is rated as an ultra-low-emission vehicle, while the Prius garnered a super-low-emission vehicle rating, which is below the Insight's rating. According to Honda, both cars ultimately get all their energy from burning gasoline, but they improve efficiency by using the electric portion of the power train fueled from temporary storage of energy that would otherwise be wasted, such as by braking. In the Honda Insight, as the car slows down, the gasoline engine is switched to the fuel-cut mode and the electric part of the motor kicks in. The power that is being wasted in stopping the vehicle is captured as energy in the car's batteries, so it can be used later. This process is called regenerative braking.

There are currently fewer than 15,000 hybrid vehicles on U.S. highways. Honda reports 3,805 Insights were sold as of Jan. 1, and Toyota said it had sold about 7,000 Prius models as of the beginning of the year. Toyota has sold 50,000 of the Prius model worldwide since 1997. Nationwide said it insures fewer than 1,000 of the hybrids. But as Steve Armstrong, an actuary for Allstate, said, "the experience is to come with these models."

The loss costs from the lightweight construction of the hybrid vehicles, as well as the cost to repair hybrid engines, are big questions looming for insurers. "There will be a period of time for loss costs to develop because of the introduction of different components," said Nationwide's Cummins.

Kevin Kelso, vice president of auto product management for Farmers Group, also is looking to see how the hybrids will play out in the future. "As they become more popular, they are fundamentally different enough that they may impact loss data as they become a larger part of the total vehicle pool--kind of like air bags and anti-lock brakes," Kelso said. "We all have to keep up on what technologies the manufacturers are incorporating, because sometimes these changes fundamentally change the vehicle. I'm sure everyone in the industry is looking at these changes. If they're not, they'll regret it in a year."

Law Fuels Hybrids

The federal Clean Air Act and state mandates are helping to drive the market for the hybrids. California's Air Resources Board recently passed a measure requiring automakers to offer 3 million zero-emission vehicles for sale in the state in the next decade. California is ranked No. 1 in private-passenger auto insurance sales, with $13 billion of direct premiums written in 1999, according to A.M. Best Co. data, New York, ranked third in the country, is following California's strict air standards. But in late February, General Motors Corp. filed a lawsuit to try to force a repeal of the Air Resources Board's zero-emissions mandate, citing cost and safety concerns. GM officials say that the rule is not only 150 times more expensive to implement than any other Air Resources Board rule, it will also put "golf-cart-sized vehicles" on the road that may pose a danger to drivers.

Despite the concern about the air mandate, GM announced it would begin selling its version of the hybrid engine car in 2004. A midsize sport-utility vehicle is GM's first ParadiGM vehicle planned for production. Dodge, a division of DaimlerChrysler AG, also has created a hybrid vehicle called the PowerBox, which is an SUV that achieves 60% better fuel efficiency than a comparable all-gasoline powered SUV.

The changes for insurers do not end with hybrid engines. Automakers and oil companies are busy investing in fuel-cell research. DaimlerChrysler announced late last year that it was investing more than 1 billion euro (about $925.9 million) for mass production of a new drive system using fuel cells. DaimlerChrysler predicts it will produce its first passenger car equipped with fuel cells by 2004. This cutting-edge form of fuel produces energy by combining hydrogen with oxygen. Fuel cells generate no pollutants, and engines powered by the cells are silent. But the source of the fuel and the cost of the cells are drawbacks at this point.

                  Top 5 Private-Passenger Auto Writers
          While State Farm has held on to its spot as the top
          private-passenger auto insurer, its competitors are
                 are chipping away at its market share.
                                 ($000)
                                         1999        %         1998
                                       Direct  Premium       Direct
Rank    Company/Group                Premiums   Change     Premiums
  1     State Farm Group          $22,413,692     -3.4  $23,200,363
  2     Allstate Insurance Group   14,523,302     -0.3   14,564,547
  3     Farmers Insurance Group     6,753,495     -2.1    6,898,532
  4     Progressive Group           5,710,221     16.6    4,896,052
  5     Nationwide Group            5,205,522      2.8    5,053,082
($000)
        % Market Share
Rank              1999  1998  1997
  1               18.9  19.7  20.5
  2               12.2  12.4  12.3
  3                5.7   5.9   6.0
  4                4.8   4.2   3.7
  5                4.4   4.3   4.3
Source: A.M. Best Co.