Why Age Matters

Insurers find the mere presence of a driving license is not an accurate assessment of the risk posed by young and elderly drivers. The link between age and driving ability is indirect but substantial. And insurers require a risk classification variable that captures this relationship. The inclusion of age in the design and distribution of auto insurance captures real differences among prospective insureds.

Can insurers rely less heavily on age as a classification variable? The best solutions to reducing the importance of age in auto insurance remain outside the realm of insurance. For young drivers, the literature suggests the two-pronged approach of improving new driver education and bestowing full driving privileges in a more gradual fashion are achieving many worthwhile objectives.

Unlike youthful drivers, elderly drivers often see changes that are permanent and that tend to result in poorer driving ability. Ultimately, testing for a driver’s license should signal a minimum fitness to drive. The reliance on age as an underwriting variable can be decreased through better assessments of fitness to drive and through the implementation of changes that increase road safety for all road users. To the extent that such changes are successful, insurance rates for the elderly will remain stable and affordable. However, for both young and old drivers, their greater heterogeneity of skills and ability leads to greater intra-class differences in risk exposures for driving than is observed in other age classes. That spread cannot be expected to disappear completely.

Overall, research shows the age variable is capturing real differences among insureds – and prospective insureds – that are not captured by any of the other variables examined. Age is not arbitrary and it is not redundant. Therefore, we have not reached the point where age can be eliminated from insurance processes without creating market disruptions and increases in moral hazard that are themselves undesirable.

AGE CORRELATIONS

In Canada, both the frequency and severity of auto accidents are highly correlated with age. Nominally, young drivers have the greatest frequency of accidents and the highest fatality rate. However, when adjusted for distance traveled, seniors have the worst accident history. As shown in Figure 1 (Page 60), combining the full age spectrum produces a U-shaped curve that reveals the disproportionate number of young and old drivers consistently killed in traffic accidents.

In private Canadian insurance marketplaces, a set of legal precedents has resulted in auto insurers being allowed to use age as a basis for pricing. The landmark case on this point is Zurich Insurance Co. v. Ontario (Human Rights Commission (1992) 16 C.H.R.R. 3D/255 S.C.C.). In that ruling, the Supreme Court declared the insurance industry could continue to use criteria such as age and marital status as a bona fide means of assessing risk; at the same time, the industry could not do so indefinitely because of the discriminatory tendencies of the practice.

WHY CLASSIFY RISK?

Insurers have clung to age as a risk classification variable for automobile insurance, and for good reasons. As the economic theory of insurance reveals, when sufficient data are available, financial benefits await sellers who separate consumers by risk type. There exists sufficient experience at most ages to credibly rate automobile insurance, the exception being the “old” elderly (drivers 85 years old and above). An insurer that fails to base premiums on information known to be correlated with differences in expected claims will lose money to adverse selection. Thus, classification variables are used in a competitive marketplace when the cost of implementing them produces a net gain. From an actuarial perspective, age is both accurate and reliable. And it is an easy variable to implement operationally. If insurance professionals can gain a better understanding of the reasons that age relates to driving ability, they will be able to help their customers understand it better too.

YOUNGER DRIVERS

Lack of experience is a key factor explaining the accident history of young drivers. Novice drivers face greater risks than experienced drivers. Studies have found that experienced drivers understand better than novice drivers the signals used in traffic situations. New drivers have difficulty adequately searching the roadway before making a maneuver such as a lane-change; are unable to adjust speed and driving distance to driving conditions; cannot compensate for a restricted field of view; and are easily distracted. Even seemingly physical tasks, such as shifting gears, are more difficult for newer drivers because of the newness of the task. Not surprisingly, driver inexperience is cited as a contributing factor in fatal crashes at a much higher rate (3.41%) for young drivers than for middle-aged drivers (0.62%).

Added to this lack of experience is the risk-taking behavior of young adults. Young people take more risks than the rest of the population and drive in more risky situations. Research has shown that risk-taking behavior – which includes the use of drugs and alcohol, driving too fast, not wearing a seatbelt, and driving in unsafe situations – is the major cause of at-fault accidents by young drivers. Among young Canadian drivers, 38% admit to engaging in risky driving behaviors and nearly all (93%) speed. Over 20% of youth between 16 and 19 years old, and 26% of youth between 20 and 24 years old, reported having received a moving traffic violation in the past 12 months, compared to 9% of 35- to 44-year-olds.

All of this leads to an accident rate that exceeds that of the general driving population. In 2000, persons aged 16 to 24 accounted for 15% of Canada’s population, 13% of total driving licenses, 7% of the total kilometers driven, and 26% of auto accident fatalities and injuries. Traffic accidents are the leading cause of death for youth between 15 and 19 years old. Younger drivers drive greater distances on weekends and more often after midnight than older drivers and are more likely to be involved in collisions than any other age group. Fifty per cent more younger drivers are involved in collisions than older drivers – despite the fact that those aged 55 and over drive more than three times the distance. Excessive speed is a factor in 18% of fatal crashes among young Canadian drivers, but less than 10% of fatal crashes among middle-aged drivers.

Illicit drug use can also be fatal. Studies have shown the rate of illicit drug usage in fatal crashes in Canada between 1984 and 1993 among under-25 drivers is double that observed for 25- to 64-year-old drivers. In contrast, however, teenage drivers are much less likely to drive after drinking than any other age group and teen drivers account for only 5% of all impaired driving trips. The bad news is that even low levels – below the legal impairment level – of alcohol impairment were twice as common in fatal crashes involving young drivers than middle-aged drivers.

OLDER DRIVERS

Like many other nations, Canada faces an aging population. In 2004, those over 65 comprised approximately 13.1% of the population. Statistics Canada projects that almost 8 million people (23.1% of the population) will be age 65 and over in 2016. The changing composition of the population is reflected in a changing population of drivers. By the year 2025, it is estimated the proportion of drivers who are elderly or disabled will be approaching 20%. Medical research reveals how age-related declines, especially impairments of sensory, cognitive, and motor functions, correspond to increased driving risk.

The two most important sensory abilities that affect driving are hearing and vision. Hearing loss makes drivers less able to hear important cues while driving. Age-related visual impairment is the most extensively studied characteristic in older drivers. Visual impairments that impact driving safety are visual acu
ity and visual field. Visual acuity, which declines with age, refers to the ability to perceive spatial detail at a given distance. Thus it takes longer to distinguish the information being presented visually with respect to road conditions and road signs. This, in turn, reduces the time available to react to that information and to possibly avoid a crash. Shrinkage in the field of vision also leads to increasing crash risk. A reduced useful field of view means some hazards and changes in the environment that are out of the direct line of sight are recognized later by older drivers. Once again this reduces the time available to react and to possibly avoid a crash.

In addition to declines in visual and auditory ability, a decline in cognitive ability has been linked with increased crash risk in the elderly. Researchers believe the link between safe driving and memory loss may be a correlated and not a causal relationship. A decline in memory skills often signals the onset of dementia. And the crash involvement rate of seniors suffering from Alzheimer’s disease is at least twice as high as the accident history of seniors without cognitive impairments.

Other cognitive skills that decline with age and are important to driving proficiently are the ability to switch from one behavioral activity to another (cognitive flexibility), and the ability to monitor several stimuli simultaneously (divided attention). Cognitive flexibility is positively correlated with driving safely. Many driving situations require divided attention – monitoring driving speed and watching traffic flow – and the elderly have a significantly decreased ability to divide attention compared to younger adults.

Motor functions make up the final set of age-related declines. Several types of motor functions – such as muscle strength, flexibility, and endurance – affect driving skill. Older adults with less joint flexibility exhibit poorer on-road driving ability; discomfort while seated can lead to early and excessive fatigue and distraction. Restrictions in range of neck motion can impede the older driver’s ability to scan to the rear, back up, and turn the head to observe blind spots.

While all of this evidence points to possible explanations of declines in driving ability among older Canadians, such age-related declines tend to be highly correlated. This can make it difficult for licensing authorities or insurers to identify any specific age-related disability that should be monitored as a signal of poor driving.

ALTERNATIVE UNDERWRITING VARIABLES

Even though an abundance of medical and safety research relates age and driving ability, the charge of the Supreme Court is calling on insurers to find less discriminatory rate classification variables. Do any of the other variables used by insurers to classify heterogeneous insureds capture the variability arising from age? Are new classification variables available that will capture age-related variability? We examine below the number of years licensed, driving record, good student discounts for young drivers and insurance scoring,

The use of years licensed as a rating variable is used both in jurisdictions that allow age as a classification variable and in jurisdictions which prohibit age as a classification variable. When used with age, one might expect that years licensed should capture the learning argument – i.e. that new drivers pose a greater risk than experienced drivers because of the complexity of driving. The relationship between driving ability and years licensed should be (somewhat) linear.

In jurisdictions that prohibit age as a rating variable, the use of years licensed becomes a statistical proxy for age because a large proportion of all drivers get their license to drive in their teens or early 20s. In the absence of an age variable, we would expect a U-shaped actuarial relationship between years licensed and risk. To date, this U-shaped curve for years licensed as a classification criterion is reflected by charging more for new drivers and drivers that have had their license for 50 or more years. Since insurers in Canada have been able to use years licensed in this manner when age has been removed from the risk classification process, little research has been done on the effects anticipated if that variable too were to be eliminated from the set considered socially acceptable.

This proxy is not exact: evidence from government-run automobile insurance systems suggests that years licensed as a classification variable (without considering age) is less powerful. In addition, those provinces that use number of years licensed – but not age, gender, or marital status – have a higher motor vehicle injury rate per million passenger kilometers than the provinces where risk-based premiums are used. This suggests more extensive moral hazard when age is eliminated from the classification system.

A driving record is another variable that attempts to classify drivers by risk. Driving records reflect choices made by an individual in the setting relevant to the insurance transaction. The number of moving violations and accidents incurred by either the insured or vehicle is used – sometimes together with age and sometimes in place of age. Insurers offer discounts for the number of consecutive years of claims-free driving, and may have surcharges for moving violations and at-fault accidents.

The statistical predictability of driving record is valid if the past is a good predictor of the future. A bonus-malus system is ideal for classifying risks over time, given that an individual’s risk propensity is not changing. For new drivers, however, the lack of violations simply means no information is available, so the driving record cannot be used to categorize new drivers. For this population, there is no past information from which to predict the future.

The issue is different at the older end of the age spectrum. As functional aging occurs, past information becomes less reliable as a predictor of the future; driving record begins to lose its predictive power as a classification variable. An at-fault accident becomes a more serious signal for an elderly driver than a younger driver. If an elderly driver’s at-fault accident is a signal of a reduced fitness to drive, then simply imposing additional costs based on a deteriorating driving record will not produce the needed result if indeed a material decline in driving ability has occurred.

For young drivers, some insurers have attempted to partition this heterogeneous group by creating a measure of driver maturity or responsibility. A good student discount for those who have a grade point average above a specified threshold has been used by insurers in both Canada and the U.S. as a surrogate for responsibility. Good grades may reflect both choices made by a student and that student’s level of responsibility. One can argue that there exists a correlated and not a causal relationship between good grades and safe driving; according to insurers that use this classification variable, however, it is actuarially valid.

A relatively recent innovation for measuring an individual’s risk propensity is an insurance score that incorporates elements of one’s credit and insurance purchasing history. The score, which measures how an individual manages his or her financial affairs, does not include personal information such as race, gender, age, marital status, or income. The best information on the reliability of insurance scores comes from the U.S., where more than 90% of U.S. personal lines insurers in 2001 used credit information to produce insurance scores. The insurance score has proven to be highly correlated with losses.

The insurance score has initiated substantial controversy, primarily because of concerns about possible racial or socioeconomic status discrimination. This concern has been examined in several jurisdictions in the United States, including Texas, where a study found that insurance scores were not unfairly discriminatory and did not have a disproportionate impact across differ
ent racial groups. A study in the state of Washington concluded ethnicity was significant in some situations – Asian Americans were found to have the best insurance scores – and that income was also significant. One strong conclusion from this study was that the elderly had the best insurance scores and would benefit most from insurance scoring.

From the available evidence, it appears that using insurance scores in automobile insurance might allow insurers to rely less heavily on age as a proxy for driver risk. However, insurance scores face two large hurdles before they can supplant age in the rating and underwriting processes of insurance in Canada. The first concerns whether this variable contravenes provincial Human Rights Codes. The second is that the age groups of greatest concern are precisely the groups least likely to generate reliable insurance scores. Young drivers likely have inadequate credit history to permit computation of insurance scores. Similar concerns arise regarding the reliability of insurance scores for the elderly. Furthermore, if poor driving experience among the elderly arises because of functional and cognitive disabilities and not the risk-taking behavior captured by the insurance risk score, then the power of insurance scores to accurately classify elderly drivers is immediately lessened. Additional research into validity of insurance risk scores is needed across different age groups before either of these concerns can be addressed conclusively for the Canadian population.

The authors gratefully acknowledge the funding and support provided for this research by the Law Commission of Canada.