Application of Machine Learning in Automobile Insurance

1. Background Origin

Although the concept of insurance had taken shape long before the existence of automobiles, world’s first car insurance policy wasn’t issued until 1897 with years of unsecured driving in between. Due to the natural characteristic of car accident including relative simplicity of casualty appraisal and uncertainty of tortfeasor’s solvency, car insurance was born to be part of government regulation. With mass production of cars in 20th century as well as high rate of car collisions and fatalities, Massachusetts and Connecticut government took the first move. Modern insurance policy nowadays is originated from financial responsibility required by Connecticut’s 1925 financial responsibility and compulsory insurance as prerequisite for vehicle registration.

Industry background

Automobile insurance industry is regulated at state level in U.S. Except for New Hampshire, nowadays every state has compulsory car insurance liability laws, which means that everyone is guaranteed to have their car insured whether in shared or voluntary market. In voluntary or private market, car owners usually have decent financial, education background and clean driving history. As a result, insurers and policyholders enjoy free two-way selection. However, shared market is for those having worse than average driving record. In recent years, shared market is shrinking due to the emergence of nonstandard section in voluntary market.

Nowadays, people buy their car insurance from direct response. Generally, auto insurers has their auto pricing algorithm to refer to people’s demographic and geographical, car-related and driving record information for price discrimination. According to data from Statista, young male is more likely to pay more than young female. People living in Michigan has the most expensive cost of auto insurance.

There are mainly two types of auto claims, liability insurance that pays for policyholder’s legal responsibility to others for bodily injury or property damage and collision and comprehensive insurance that compensate for property loss others did to policyholder’s car. Of those two types, liability insurance is the major incurred loss contributor.

Companies in the domain

Of hundreds of automobile insurers, State Farm, Geico, Progressive and Allstate make up 50% of US auto insurance market, of which State Farm takes the absolute majority of 18.2% with direct premiums written more than $41 billion up to 2017. Company with mass volume enjoy complete eco-industrial system to integrate financial power and human resources, thus often being able to offer better customer service and more stable claim settlement.

Problems in the domain and how ML impact it

For most modern car insurers, major problems they should address are reducing cost of customer acquisition, reducing insurance fraud and simplifying claim process.