Auto Insurance: Factors Affecting Operational Level of Planning

Auto Insurance: Factors Affecting Operational Level of Planning

Team C

University of Phoenix

MGT330

Orlando Rivero

June 20, 2005

Auto Insurance: Operational Level of Planning

The insurance industry is affected by many economic factors. In an attempt to better understand the operational level of planning within the insurance industry we would like to take a look at how revenue, operating expenses, and the auto insurance market directly affect the operational level of planning of any given Auto insurance provider.

Revenue

Revenue generated by the auto-insurance industry is in the billions. According to Automotive News, the personal auto insurance business is a nearly $160 billion-a-year industry (Stoffer, 2005). Thus, many organizations, not just the auto insurance industries themselves, have generated plans for capturing this income.

For instance, automotive finance companies are trying to tap into this revenue source. While, in the past, this did not meet expectations, it is still attractive to automakers. According to Stoffer, "auto industry experts predict market changes eventually will lead to consolidation of vehicle sale or lease payments with insurance premiums. The benefits would include greater convenience for customers and more business for the industry" (2005). However, for the auto insurance industry, this could lead to a loss of business, which in turn would lead to management having to come up with a plan to make up for this lost revenue.

Another organization currently planning to make use of this revenue source is government. In Massachusetts, the legislature has proposed imposing surcharges on insurers that would pay for police training (Telegram & Gazette, 2005). This new fee, according to the insurance companies, would then be passed on to the consumer, resulting in higher premiums. While critics say that this training should be paid for by the taxpayer, proponents say that such police training would lead to a reduction in auto accidents and thus, less insurance payouts.

As shown by these examples, the revenue generated by the auto insurance industry leads to operational planning by other organizations besides the insurers themselves. The trends of the organizations to use this money in turn will effect the planning of the auto insurance companies as they deal with the changes such operations will mean for their own organizations.

Operating Expenses

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Auto Market

The market for auto insurance is becoming very competitive. Nationally, rates still are rising -- albeit at their slowest rate in five years. Spending on auto insurance is expected to grow an average of 1.5 percent this year, to $870 per vehicle, according to the Insurance Information institute. Nevertheless, many drivers are getting a break. In New York, 10 big auto insurers -- including market leaders All State, GEICO Corp. and State Farm Insurance Co. -- have cut rates an average of 5 percent to 6 percent this year, saving New York drivers nearly $350 million(Price Water House Coopers, 1999).

State Farm, the nation's largest auto insurance underwriter with about 19 percent market share, says it has dropped prices in 32 states this year while raising them in just one: North Dakota. We are seeing a more prudent form of competition that is allowing insurers to lower premiums while remaining profitable. An important factor in that prudence is the growth of sophisticated pricing models. Insurers are spending millions on technology that allows them to crunch underwriting data to more accurately match price to a driver's risk. The result: They