Road Hazards Ahead.

Deregulation leads to competition for auto business around the world.

Countries around the world are deregulating their auto insurance industries, creating opportunities for U.S. insurers that are interested in expanding globally.

As markets begin opening their doors to foreign competition, rate-making becomes important. Most markets regulated by the government set the rates or tariffs so the insurers that participate in the voluntary portion of those markets all charge the same rates.

As a result, deregulation is creating major changes in the way auto insurers underwrite and price their products, said Terry Clarke, managing principal of the property/casualty division of Tillinghast-Towers Perrin, New York.

For example, Israel's new automobile law, which takes effect Jan. 1, reforms the auto insurance market and creates competition between the country's approximately 30 insurance companies. Israel is replacing its uniform tariff system with a structure based on additional underwriting criteria and more detailed loss experience. New York-based Insurance Services Office Inc. was awarded a three-year, $5.45 million contract to establish and operate the insurance data bank for Israel's $1 billion liability auto insurance market, which covers some 1.2 million passenger autos and 500,000 commercial vehicles. The data bank will collect and verify statistical data from insurers; create an auto risk classification and a statistical plan to identify auto risks; and provide insurers and regulators with estimates of future claims payments.

Israelis typical of the privatization movement--a big, emerging market where the state-run reinsurance monopoly is being disbanded, said LeRoy A. Boison, ISO's senior vice president, insurance services.

With the reinsurance monopoly, insurers were required to co-insure their books of business. "Since the companies were laying off the risk, there wasn't any real concern in getting the price right, because it was all being placed in a pool," Boison said.

The same situation--a mandated state-run reinsurance pool--exists in Brazil and Argentina and eliminates the need for insurers to compete on price, Boison said.

In Israel, "the government was concerned that as long as you allowed for this co-insurance, it would allow for cartel activity," he said. "The new law eliminated co-insurance, and as soon as they did that, there came the need to price it right and add classification so you avoid adverse selection." Previously, rates were based strictly on the weight of the vehicle.

Repricing European Risks

Wide-scale deregulation of the auto market in European countries grew out of the European Union's Third Nonlife Directive, which said all types of insurance needed to be competitive, Clarke said.

Italy was among the first European countries to deregulate its auto market.

Before deregulation in the mid-1990s, age and gender were not used as underwriting criteria, only the size of the vehicle and where the policyholder lived. Deregulation necessitated moving from a two-variable product to a multivariable product.

To reprice their auto product more competitively, Italian insurers needed to develop a database of loss experience based on age and gender. It was difficult, because that information was not gathered by underwriter. To collect the data as Italy began to deregulate the line, Tillinghast-Towers Perrin dissected motorists' social security numbers, which are coded to include age and gender information, Clarke said.

"Age experience from one country to another is very similar," Clark said. "It is true in most countries that young drivers are more expensive."

Market Opening in Japan

Japan is the biggest international market currently in the process of deregulation. Japan recently abolished its tariff rate system for auto insurance as part of the financial reform dictated there in the mid-1990s, when the country's stock market and banking system teetered on the brink of collapse. Japan's insurance law was revised in 1996 and the regulatory authority was transferred from the Ministry of Finance to the new Financial Supervisory Agency.

As Japanese auto insurers begin to adapt to deregulation, "we're finding an interest in much more in-depth statistical analysis, greater segmentation and alternative means of distribution," Clarke said.

Japanese auto insurers are saddled with very high expense ratios, a byproduct of high commission rates. As a result, foreign companies coming in as direct marketers are not hampered by the expense of agent commissions and have been readily competitive, Clarke said. But it is expensive to start a direct-selling insurance operation, because the new entrant must advertise extensively to build name recognition. In addition, some countries' phone systems are not suited for telemarketing, he said.

Once insurers clear those hurdles, cultural issues will make it difficult for them to expand their portfolios. "It takes a lot of time to be accepted. The Japanese people are conservative and very loyal," he said. "They are not likely to change auto insurers because of price, but as the economy changes in Japan, price may become more important."

Traditionally, getting cheap car insurance was not the issue in Japan--customer service was the prime consideration in selecting an auto insurer. To compete on service, Japanese insurers currently offer roadside services and hotel accommodations for stranded motorists at no additional premium, said Teruhisa Amano, an analyst in the international division of A.M. Best Co.

Property damage claims are frequent, because drivers want their cars to be in perfect condition. The no-deductible auto policy is gaining popularity there, Amano said.

Japanese motorists are required to have the government-mandated Compulsory Automobile Liability Insurance, which covers up to $200,000 per accident. Private insurance provides property damage insurance along with unlimited liability cover on top of CALI.

American International Group, through its American Home Direct subsidiary, introduced direct marketing for auto insurance and promised discounts of as much as 30% off standard rates. When it started offering discounts based on driving record and age in 1997, American Home was required to leave the auto insurance rating association that was responsible for enforcing tariff rates among its members. AIG wrote an estimated [yen]77.9 billion (about $729 million) in auto premiums in Japan in 1999, up from [yen]1.3 billion in 1997, according to the Foreign Non-Life Insurance Association of Japan. Zurich Insurance Co., which offered a similar product, wrote an estimated [yen]10 billion in auto premiums there last year, up from [yen]400 million in 1997, the association said.

Foreign insurers eventually may capture 6% of Japan's auto market, but the more likely impact is that deregulation will set off a price war among domestic carriers, Amano said. Agents' commissions will be deregulated, and as a result, agents may become more powerful, he said.

Standard & Poor's, the New York-based credit-risk appraiser, recently released a report indicating that Japan's general insurers are set to experience a difficult period. The report said that fiscal 1999 results showed a deterioration in the industry's average loss ratio that was caused primarily by intense competition brought about by the deregulation of prices and products in auto insurance lines in 1998. Smaller insurance companies are considered to be the most vulnerable to the effects of deregulation, according to the report.

When a Japanese motorist applies for auto insurance for the first time, the driver is assigned to grade level 6. If no accident occurs, the driver moves up the scale each year with the most preferred drivers reaching a maximum of grade level 16. If, however, the motorist is involved in an accident, that person drops at least one grade level and incurs a surcharge.

While some U.S. insurers are eyeing Japan's auto market, Allstate Insurance Group decided in January to exit it, despite a long-standing commitment of people and capital there. "Given the fierce competitive pressures in Japan and marketing expenditures that had risen to unprecedented levels, we believed there was little likelihood of an acceptable financial return in the short-to-medium term, even with a significant capital investment," company spokeswoman Sharon Cooper said. "We still believe in the long-term potential of the Japanese market and would like to keep our options open. But at this time, we have no plans to reenter the market."

Allstate entered Japan's auto market in 1982 with the establishment of Allstate Automobile & Fire Insurance Co. In 1984, Allstate Automobile & Fire formed a 50/50 joint venture with Saison Group. That joint venture was dissolved in 1997, with Allstate Automobile & Fire retaining a 5% share in the venture that was renamed Saison Automobile & Fire Insurance Co. in 1998. Allstate Property & Casualty Insurance Japan Co. was established in 1998, but it closed in January 2000.

As competition begins to reshape Japan's auto market, domestic companies are experimenting with pricing options. For example, one carrier instituted discounts for sport-utility vehicles, ISO's Boison said.

"You see a lot of inertia and reluctance to change, but clearly the Fair Trade Agreement is really changing the lay of the land," Boison said. "AIG has been very aggressive in trying to cherry-pick the risk."

Theft, Fraud Are New Risks

Japan's auto insurers are facing a new problem--auto theft. "In Japan, there used to be no such thing as theft, but auto theft is starting to become a problem; they are talking about the need for a claims database," Boison said.

Rate-making becomes a primary concern when a country deregulates its insurance industry. Claims fraud is the other important piece of the puzzle, Boison said.

Venezuela is establishing an auto-claims database designed to identify potentially fraudulent auto claims. ISO has developed a monitoring service that will use a newly created database of the identification numbers of the vehicles each insurer covers. The system is designed to alert insurers when two or more of them are insuring the same vehicle, based on a search for matches on such fields as name and address, personal identification number, vehicle identification number and driver's license number. One of the most significant sources of auto fraud in Venezuela is perpetrated by individuals who insure the same vehicle with multiple insurance companies and then collect on a claim from all those carriers.

"For them, fraud is more of a problem than rate adequacy," Boison said.

Fraud also looms large in Europe, where separation between the governments and very strict privacy laws present barriers to fighting it, Boison said. But that may be changing with the emergence of the European Union, which is soliciting sharing of information between member nations.

In May, the European Commission adopted new rules designed to ensure that visiting motorists from European Union member states get rapid compensation in case of a motor vehicle accident while abroad. The new rules, known as the Fourth Motor Insurance Directive, provide for improved information, easier procedures and quicker settlement of claims. The new law will apply not only when the accident takes place within the EU, but also when the accident occurs between two EU parties in a non-EU country that belongs to the green-card system. This system covers some 40 countries, including EU members and others in proximity, such as Switzerland, Norway and Eastern European nations.

"We've observed a universal concern over the pricing of general liability insurance," Boison said. "Even the biggest countries in Europe are very concerned when they get to general liability that no one company is going to have credible data."

Unrest in British Columbia 

The debate over deregulation of the auto market is heating up in British Columbia, one of three Canadian provinces where the state-run insurance monopoly mandates basic coverage. Private-sector insurers have been left to compete at the margin for additional comprehensive and collision coverages, said George Anderson, president and chief executive officer of the industry-sponsored Insurance Bureau of Canada. More than 200 Canadian property/casualty insurers are ready and eager to take on the market, he said.

Trends fueling the debate over deregulation include a worldwide movement away from state monopolies to give consumers more choice, discontent from British Columbians over insufficient service and an influx of new residents from competitive auto markets where rates were lower, Anderson said.

"Every survey we do shows an overwhelming majority in favor of more competition," Anderson said, noting that the bureau has not taken a position on how deregulation ought to be accomplished.

The consumer discontent over higher prices is tied largely to the underwriting criteria--age and gender aren't considered. As a result, older, lower-risk drivers subsidize younger drivers--especially the 10% of drivers who are young men and 4 1/2 times more likely to have an accident than their parents, Anderson said.

"We're trying to interest the government in privatization of that monopoly," Anderson said. Privatizing the state-run Insurance Corporation of British Columbia or opening a portion of the market to insurers are options that have been discussed. The trade association hasn't taken a position on either, but "we do think as a principle, in the long run, the state ought not to be in that business," he said.

One proposal that has been advanced--to sell the state-run insurance company to its policyholders--could work if it becomes fully competitive with private insurers, he said.

Canada's two other provinces that have a government monopoly on auto insurance, Saskatchewan and Manitoba, don't have a growing population, so there is no movement to privatize, Anderson said.

Despite the barriers for U.S. auto insurers that want to expand internationally, economic factors can make it an option to be considered. "The conventional wisdom is that because the U.S. auto market is not expanding, companies are looking overseas," Clarke said. "But in terms of creating shareholder value by creating a greenfield site or acquisitions, one doesn't really see American companies looking outside the United States."

Compared with most countries in Europe, the United States still has considerable controls, such as rate filing and the approval process. In the European countries that have competitive ratings, governments officially can't influence policy wording or the actual rating structure. In Europe, regulators control the insurance industry through the balance sheet. Financial solvency is deemed to be sufficient, Clarke said.

But now, there is at least an attempt to regain some regulatory control. Italy has begun trying to control premium rates because they want to control inflation, he said.

Managing the Global Fleet

The deregulation of auto markets around the world is making it easier for U.S.-based multinational corporations to consolidate coverage for their far-flung fleets of vehicles.

But while some jurisdictions are relaxing the rules, a maze of requirements and documentation and a multitude of claims-reporting styles and technologies make the establishment of global auto programs complex.

Take, for example, a rear-end collision in which no one is injured. "We found it was reported 22 ways in 22 countries," said Elizabeth Demaret, an international vice president in Near North's Global Operations practice, Chicago. Language barriers confound the reporting process, and common claims codes among countries are lacking, she said.

U.S.-based multinational corporations with at least 1,000 company vehicles in several countries around the world are interested in coordinating the insurance coverage. The interest stems from their desire to equalize coverage, more effectively manage loss control and leverage cash flow, Demaret said.

There is no rule of thumb as to when a multinational company decides to consolidate its auto program. Some companies with as many at 18,000 vehicles in several countries are still insuring them on a local basis, said Andrew Mac innon, vice president, cash now programs, Ace USA, U.S. International, Wilmington, Del.

"The problem with local programs is that today everyone wants to know all the costs of doing business," Mac innon said. "If transportation is critical to the business, it is a cost of doing business."

There are significant legal and administrative barriers to establishing a global auto program. Each country has its own set of laws--most of which are compulsory and mandate different terms and conditions. For example, some countries require one policy per auto. A lot of countries don't have computer systems that can issue auto identification cards.

And it is difficult to administer a global auto program from one technology platform. "Once you have that program, everyone has to understand what is going to be reported and how it is going to be reported," Demaret said.

Translating claims data so it is usable in one system is a challenge.

"The carriers are trying to create a single [claims-reporting] system," Demaret said. "The technology has been a help in pushing this farther along in the past 10 years than in the past 30 years." That's a vast improvement over the 1980s, when U.S. companies didn't know their losses for a year, she said.

To make its consolidated auto programs more effective, Ace USA upgraded its claims-reporting system over 24 months with the aid of a third-party administrator. That involved making sure all fields were compatible so Ace can accept electronic feed from around the world into its system. "That was a major problem for us" Mac innon said.

Now, instead of monthly loss feeds, Ace customers receive them biweekly, translated into U.S. terms and U.S. dollars, giving risk managers more timely information on how claims are progressing.

"It comes straight out of the Ace system. Customers can have online capabilities to access them anytime," Mac innon said.

Ace begins to craft a consolidated auto program by gathering the underwriting information, projecting the loss experience and comparing that information against its internal portfolio on a global and local basis. Based on that information and after determining how much risk a company wants to retain and building in the expenses of running the program, the premium is determined, Mac innon said.

It is likely that a company will not save money in every country with a global auto program, but that the cost will even out and the company will be able to control the costs better, Demaret said.

Some recently deregulated markets are soft because price competition is escalating. That is the case in France, Mac innon said. But in areas where litigation has begun to result in large damage awards, such as the United ingdom, the market is hardening, he said.

Because a company's operations in some countries will end up paying more for auto insurance, senior management has to buy into the concept. "Everyone has to see that global auto makes a big-picture difference," Demaret said.

A company needs to select one insurer with a global network of admitted carriers around the world, Demaret said, noting that likely candidates are Allianz, Zurich, Ace USA and American International Group.

A carrier with a global network issues a master policy. Underneath that, there is an admitted policy in each country that will get them to the legal compulsory limits in that country, Demaret said.

While an auto program may be global in scope, it is necessary to have people on the ground to monitor changing conditions locally Near North National Group works with brokers in 103 countries to establish global auto programs. Ace has representatives in 50 countries and arrangements with fronting facilities in other locales.