Cellphones and Driving

 Cellphones and Driving 

Increased reliance on cellphones has led to a rise in the number of people who 

use the devices while driving. There are two dangers associated with driving 

and cellphone use, including text messaging. First, drivers must take their eyes 

off the road while dialing. Second, people can become so absorbed in their 

conversations that their ability to concentrate on the act of driving is severely 

impaired, jeopardizing the safety of vehicle occupants and pedestrians. Since 

the first law was passed in New York in 2001 banning hand-held cellphone use 

while driving, there has been debate as to the exact nature and degree of hazard. 

The latest research shows that while using a cellphone when driving may not 

be the most dangerous distraction, because it is so prevalent it is by far the most 

common distraction in crashes and near crashes.

Research: Studies about cellphone use while driving have focused on several 

different aspects of the problem. Some have looked at its prevalence as the lead-

ing cause of driver distraction. Others have looked at the different risks associat-

ed with hand-held and hands-free devices. Still others have focused on the seri-

ousness of injuries in crashes involving cellphone users and the demographics 

of drivers who use cellphones. Of increasing concern is the practice of texting.

In January 2010 the National Safety Council (NSC) released a report that 

estimates that at least 1.6 million crashes (28 percent of all crashes) are caused 

each year by drivers talking on cellphones (1.4 million crashes) and texting 

(200,000 crashes). The estimate is based on data of driver cellphone use from 

the National Highway Traffic Safety Administration and from peer-reviewed 

research that quantifies the risks using cellphones and texting while driving. 

In July 2009 Virginia Tech Transportation Institute released a study show-

ing that the risk of texting while driving is far greater than previous estimates 

showed and far exceeds the hazards associated with other driving distractions. 

Researchers used cameras in the cabs of trucks traveling long distances over a 

period of 18 months and found that the collision risk became 23 times higher 

when the drivers were texting. The research also measured the time drivers 

stopped looking at the road and used their eyes to send or receive texts. Drivers 

generally spent nearly five seconds looking at their devices before a crash or 

near crash, a period long enough for a vehicle to travel more than 100 yards at 

typical highway speeds.

Climate Change: Insurance Issues

There is now a consensus among the scientific community that the climate 

is changing, with potential risk to the global economy, ecology, and human 

health and well being. But how much of this is due to natural phenomena and 

how much to the effects of human activity is a matter of debate. Also unknown 

is the extent to which weather patterns have already been affected.

As assumers of risk, insurers seek to mitigate potential losses every day 

through a process known as risk management. Since climate change could 

lead to losses on a scale never before experienced, insurers are not waiting for 

researchers to produce all the answers. A 2009 report by Ceres, a network of 

companies concerned about global warming, identified some 244 insurance-

related organizations in 29 countries that were working in 2008 to find solu-

tions to the threat posed by greenhouse gas emissions, up from 190 groups 

in 26 countries in 2007. Insurers are also redoubling their efforts in the more 

traditional areas of risk management, including alerting policyholders to the 

potential for lawsuits for failure to protect against or disclose possible harm to 

the environment.

Meanwhile, society’s concern about climate change offers insurers new ave-

nues for leadership and new opportunities for innovative products.

Global Warming: When fossil fuels—coal, oil and natural gas—are burned to 

produce energy, so-called greenhouse gases, largely carbon dioxide, are emitted 

into the atmosphere where they trap heat. Forests and oceans can absorb some 

of the carbon. But to avoid the most catastrophic effects of what is predicted 

to occur, researchers say, carbon emissions must be greatly reduced, hence 

the push to reduce overall energy use, boost the use of energy from renewable 

sources such as solar heat and curb the use of paper and other products made 

from trees, which absorb carbon dioxide in the process of photosynthesis.

Global warming has the potential to affect most segments of the insurance 

business, including life insurance if rising temperatures lead to an up-tick in 

death rates. Property losses of all kinds are most likely to increase, and there is 

the potential for much higher commercial liability losses if shareholders and 

consumers try to hold businesses responsible for changes to the environment.

Insurers’ Contribution to Lowering Greenhouse Gases: Insurers, like compa-

nies in other industries, are promoting strategies to lower greenhouse gas emis-

sions. Some insurers have been warning public policy leaders and the general 

public about the threat of climate change for years, and others were among the first to adopt public statements on the environment and climate change and to 

join business coalitions calling on the federal government to enact legislation to 

reduce greenhouse gases. Some, particularly reinsurers, are sponsoring research 

and working with others interested in the same kind of solutions, such as find-

ing ways for individuals and society to adapt to extreme weather, particularly in 

developing countries.

Many insurance companies are committed to reducing their own total 

greenhouse gas emissions and offsetting the remainder through contributions to 

reforestation and renewable energy projects. They also encourage their employ-

ees to adopt “green” policies in their private lives. Some were involved in proj-

ects to reduce greenhouse gases even before such efforts gained widespread pub-

lic attention, and many are now reinforcing their policyholders’ desire to reduce 

their carbon footprints by offering them paperless billing and documentation. 

Some have upgraded the quality of their Web sites to encourage policyholders 

to transact business electronically. At least one auto insurer sells policies exclu-

sively online.

Insurers are also working on another front: seeking to reduce the incidence 

and cost of property damage caused by those events that still occur, despite soci-

ety’s best efforts to reduce greenhouse gases.

New Products and Business Opportunities: Without insurance the economy 

could not function. Insurers essentially enable new products and services to 

be created by assuming the risk of loss. Just as they quickly adapted existing 

liability insurance policies for horse-drawn carriages, or teams of horses, to auto-

mobiles towards the end of the nineteenth century, so they are responding to 

climate change initiatives at the beginning of the twenty-first century.

Opportunities exist on several fronts. First, there are new risks to insure, 

including new industries such as wind farms and other alternative fuel facilities, 

and emerging financial risks such as those involved in carbon trading. Insurance 

policies related to carbon trading protect those that invest in clean technol-

ogy projects against failure of the project to deliver the agreed-upon emission 

rights. A number of companies are also offering their clients carbon project risk 

management consulting services. A carbon credit permits the holder to emit one 

ton of carbon. The Kyoto Protocol and other cap and trade systems now under 

discussion set ceilings for carbon output and allow those that produce less than 

the limit to sell credits to those that exceed it. Investors in clean technology 

projects such as reforestation and renewable energy buy the rights to credits and 

sell them in the international carbon trading market. Among the risks associated with purchasing carbon trading rights is that the technology/project designed 

to reduce carbon emissions will not meet expectations or that the company 

will become insolvent before it is able to fulfill its contract, leaving the investor 

without the necessary carbon offsets.

Second, the need to curb global warming has spurred the creation of insur-

ance policies that provide incentives to policyholders to contribute to these 

efforts. These include discounts on auto insurance policies for owning a hybrid 

car and for driving fewer miles and policies for green building construction.

Auto Insurance Initiatives: Motor vehicles account for more than 25 percent 

of all U.S. greenhouse gas emissions. Insurance policies such as pay-as-you-

drive, which factors mileage driven into the price of insurance, and hybrid car 

discounts could reduce that amount by more than 10 percent if broadly imple-

mented, according to Ceres, a network of companies concerned about global 

warming. A study by the Brookings Institution suggests that if drivers paid by 

the mile, driving would drop by about 8 percent.

There are two ways to reduce the greenhouse gas emissions associated with 

driving. One is to encourage people to purchase vehicles that emit less carbon 

dioxide into the environment and get more miles per gallon of gasoline. A 

number of companies offer discounts to people who drive hybrid vehicles—

some believe that people who are socially responsible are also more responsible 

behind the wheel. The other way is to reward people for driving fewer miles, 

known as pay-as-you-drive (PAYD) auto insurance. Several insurers have devel-

oped technology-based discount programs that provide financial incentives to 

drive fewer miles. Mileage information comes from a special device. In some, 

it is linked to the car’s odometer and in others it is a wireless sensor that can 

monitor speed as well as mileage. These programs are offered in a growing num-

ber of states. In addition, California and several other states are encouraging the 

development of PAYD programs.

Insurers are helping to promote sustainable building practices by offering 

green homeowners and commercial property policies. In addition, they are 

responding to the growing demand for assistance with energy and emissions-

reduction projects with risk management services that address global warming.

“Green” Building Insurance Coverage: Increasingly, homeowners at the lead-

ing edge of the environmental sustainability movement are generating their 

own geothermal, solar or wind power and selling any surplus energy back to 

the local power grid. Several insurers are supporting this trend by offering a 

homeowners policy that covers both the income lost when there is a power  

outage from a covered peril and the extra expense to the homeowner of buying 

electricity from another source. Policies generally cover the cost of getting back 

online, such as utility charges for inspection and reconnection.

Some insurers offer homeowners insurance policies that, in the event of a 

fire or other disaster, allow policyholders to rebuild to environmentally respon-

sible “green” standards, even if they had not purchased such a policy originally. 

Green standards, part of the sustainability movement, include energy conserva-

tion benchmarks and the use of renewable construction materials. The Green 

Building Council introduced its Leadership in Energy and Environmental Design 

(LEED) certification program in 2001. According to Ceres, buildings account for 

more than one-third of greenhouse gas emissions and green building practices 

can reduce energy use and emissions by more than 50 percent.

With green commercial building construction expected to rise significantly 

over the next few years, a growing number of insurers are offering green com-

mercial property insurance policies and endorsements, some of which are direct-

ed at specific segments of the business community such as manufacturers. The 

first green commercial policy was introduced in 2006.

In general, the policies allow building owners to replace damaged buildings, 

whether or not they are already certified green, with green alternatives includ-

ing energy efficient electrical equipment and interior lighting, water conserving 

plumbing, and nontoxic and low odor paints and carpeting. They also may pay 

for engineering inspections of heating, ventilation, air conditioning systems, 

building recertification fees, the replacement of vegetative or plant covered roofs 

and debris recycling. Some cover the income lost and costs incurred when alter-

native energy generating equipment is damaged.

Credit Scoring

The goal of every insurance company is to correlate rates for insurance policies 

as closely as possible with the actual cost of claims. If insurers set rates too high 

they will lose market share to competitors who have more accurately matched 

rates to expected costs. If they set rates too low they will lose money. This con-

tinuous search for accuracy is good for consumers as well as insurance compa-

nies. The majority of consumers benefit because they are not subsidizing people 

who are worse insurance risks—people who are more likely to file claims than 

they are.

The computerization of data has brought more accuracy, speed and effi-

ciency to businesses of all kinds. In the insurance arena, credit information has 

been used for decades to help underwriters decide whether to accept or reject 

applications for insurance. New advances in information technology have led to 

the development of insurance scores, which enable insurers to better assess the 

risk of future claims.

An insurance score is a numerical ranking based on a person’s credit history. 

Actuarial studies show that how a person manages his or her financial affairs, 

which is what an insurance score indicates, is a good predictor of insurance 

claims. Insurance scores are used to help insurers differentiate between lower 

and higher insurance risks and thus charge a premium equal to the risk they are 

assuming. Statistically, people who have a poor insurance score are more likely 

to file a claim.

Insurance scores do not include data on race or income because insurers do 

not collect this information from applicants for insurance.

The Poor Economy Has Not Had a Negative Impact on Credit Scores: 

According to an April 2009 Property Casualty Insurers of America (PCI) release, 

the recent economic downturn did not have the negative effect on credit scores 

that some people predicted. Major consumer credit reporting agencies such 

as Fair Isaac and TransUnion have reported that average scores remain steady 

or have improved, possibly because consumers are saving more and paying 

off debt. Despite the economy and credit crisis, no state has made regulatory 

changes to insurers’ use of insurance scores, PCI notes. 

Federal Activities: The Federal Trade Commission (FTC) has asked nine of 

the largest homeowners insurance companies to provide information that it says 

will allow it to determine how consumer credit data are used by the companies 

in underwriting and rate setting. The Fair and Accurate Credit Transactions Act, 

passed in 2003, directed the FTC to consult with the Office of Fair Housing and  Equal Opportunity on how the use of credit information may affect the avail-

ability and affordability of property/casualty insurance, whether the use of cer-

tain factors by credit scoring systems could have a disparate impact on minori-

ties and, if so, whether the computer models used could be modified to produce 

comparable results with less negative impact. The study is expected to be final-

ized sometime 2010.

In a similar study, the FTC found that auto insurers’ use of insurance credit 

scores leads to more accurate underwriting of auto insurance policies in that 

there is a correlation between insurance scores and the likelihood of filing an 

insurance claim. The FTC report, Credit-Based Insurance Scores: Impacts on 

Consumers of Automobile Insurance, released in July 2007, also states that 

credit scores cannot easily be used as a proxy for race and ethnic origin. In other 

words, credit scoring predicted risk for members of minority groups in much the 

same way that it predicted risk for members of nonminority groups.

The Fair and Accurate Credit Transaction Act of 2003 directed the FTC to 

address the issue of whether the use of credit had a disparate impact on the 

availability and affordability of insurance for minorities. Based on a poll of con-

sumers, the General Accountability Office has recommended that the Treasury 

and FTC take steps to improve consumers’ understanding of credit scoring and 

how credit histories are used, targeting in particular those with less education 

and less experience in obtaining credit.

The Federal Reserve also studied the use of credit scoring. Although looking 

at credit scoring to quantify risk posed by a borrower rather than an applicant 

for insurance or a policyholder, the Federal Reserve said in a report issued at the 

end of August 2007 that credit scores were predictive of credit risk and were not 

proxies or substitutes for race ethnicity or gender, underscoring the FTC study.

Insurance Scores: Insurance scores are confidential rankings based on credit 

history information. They are a measure of how a person manages his or her 

financial affairs. People who manage their finances well tend to also manage 

other important aspects of their lives responsibly, such as driving a car. Com-

bined with factors such as geographical area, previous crashes, age and gender, 

insurance scores enable auto insurers to price more accurately, so that people 

less likely to file a claim pay less for their insurance than people who are more 

likely to file a claim. For homeowners insurance, insurers use other factors com-

bined with credit such as the home’s construction, location and proximity to 

water supplies for fighting fires.

Insurance scores predict the average claim behavior of a group of people 

with essentially the same credit history. A good score is typically above 760 and  a bad score is below 600. People with low insurance scores tend to file more 

claims. But there are exceptions. Within that group, there may be individuals 

who have stellar driving records and have never filed a claim just as there are 

teenager drivers who have never had a crash although teenagers as a group have 

more accidents than people in other age groups.

Credit Report Information—Who Wants It? It is becoming increasingly 

important to have an acceptable credit record. Whether we like it or not, society 

equates the ability to manage credit responsibly with responsible behavior, even 

if individuals have a bad credit record through no fault of their own. Landlords 

often look at applicants’ credit records before renting apartments to see whether 

they manage their finances responsibly and are therefore likely to pay their rent 

on time. Banks and other lenders look at the credit records of loan applicants to 

find out whether they are likely to have loans repaid. Some employers also look 

at credit records, especially where employees handle money, and view a good 

credit record as a measure of maturity and stability.

In some insurance companies, underwriters have long used credit records 

in cases where additional information was needed. Before the development of 

automated scoring systems, underwriters would look at the data and make deci-

sions, often erring on the overly cautious side that disadvantaged many more 

people. Automated insurance scoring and underwriting systems eliminate the 

weaknesses inherent in someone’s personal judgment and have allowed more 

drivers to be placed in preferred and standard rating classifications, saving them 

money. With the development of these scoring models, the use of credit-related 

information in underwriting and rating for many insurers has become routine. 

Insurers use insurance scores to different extents and in different ways. Most use 

them to screen new applicants for insurance and price new business.

Why Insurers Need It: Insurers need to be able to assess the risk of loss—the 

possibility that a driver or a homeowner will have an accident and file a claim—

in order to decide whether to insure that individual and what rate to set for the 

coverage provided. The more accurate the information, the closer the insurance 

company can come to making appropriate decisions. Where information is 

insufficient, applicants for insurance may be placed in the wrong risk classifica-

tion. That means that some good drivers will pay more than they should for 

coverage and some bad drivers will pay less than they should. The insurance 

company will probably collect enough premiums between the two groups to 

pay claims and expenses, but the good drivers will be subsidizing the bad.

By law in every state, insurers are prohibited from setting rates that unfairly  

discriminate against any individual. But the underwriting and rating processes 

are geared specifically to differentiate good risks from bad risks. Since insurance 

is a business, insurers favor those applicants that are least likely to suffer a loss. 

One of the key competitive aspects of the personal lines insurance business is 

the ability to segment risks and price policies accurately according to the likely 

cost of claims generated by those policies. Insurance scores help insurers accom-

plish these objectives.