Auto Insurance: Loss Trends Are Still Outpacing Rate Changes

Posted by Matt Schwartz on Tue, Apr 18, 2017 @ 09:04 AM

dollarbill-coins-2.jpgAccording to an online Insurance Journal article ("Personal Auto Rate Hikes Not Keeping Up With Losses - Fitch"), U.S. personal auto underwriters increased premium rates “significantly” in 2016. But here’s the thing: it wasn’t enough.

Loss trends are still outpacing rate changes. Also, the U.S. P/C industry statutory combined ratio will likely hit 108 in the coming months, a 3.5 percentage point rise and the weakest result in 15 years, Fitch Ratings noted in a new report.

“Results are likely to improve moderately in 2017, but competitive forces and market fundamentals will inhibit a shift back to an underwriting profit in personal auto for some time,” the Fitch report asserted.

A number of factors are at play that mean the market is still weakening, Fitch said.  GAAP auto segment results show higher combined ratios for nearly all of a group of 10 publicly traded insurers in 2016, Fitch said, with an average combined ratio increase of 3.3 points from 2014 to 2016.

As Fitch pointed out, carriers including Progressive and Infinity Property & Casualty Corp. continued to generate major underwriting profit for personal auto despite industry weakness. But the overall market continues to weaken in terms of annual underwriting performance because of higher catastrophe related losses and unfavorable claims experience. State Farm Mutual Insurance Group is a major example of this, Fitch said, due to its reported $7 billion underwriting loss (18 percent of earned premium).

Also, personal auto underwriters continue to face adverse loss trends that drove higher claims costs over the last two years. They include claims frequency jumps from more miles driven, more distracted driving, higher physical damage losses because of more complex and sophisticated automobile parts, and higher bodily injury costs from more severe accidents.

As well, the Consumer Price Index data for auto insurance costs grew by 7.6 percent in February 2017. Fitch said that that points to continuing rate increases in the short term, which should lead to some modest underwriting improvements through the year.

Underscoring the challenges ahead, Fitch said that risk modeling for the sector, among the most sophisticated efforts in the industry, has not done its job the way it should.

“Personal auto insurance is technologically the most advanced P/C market segment with tremendous progress over time in data analytics that enhance risk selection, price segmentation and predictive claims models,” Fitch said. “Recent poorer results in auto insurance reveal that the most sophisticated models may not fully anticipate changes in loss cost trends.”

There’s another potential challenge for the sector. Fitch added that underwriters may not be paying complete attention to what risk modeling tells them “due to competitive pressures and an interest in maintaining premium volume and policy retention levels.”

State Farm lost $7 billion on its auto insurance underwriting in 2016.  In 2015, the underwriting loss was $4.4 billion.

State Farm is far from alone in seeing deteriorating results in its auto insurance line.

GEICO, Travelers, Allstate, The Hartford and other insurers are also looking for ways to counter rising auto costs. Analysts have reported that the auto line has been a drag on P/C insurers’ results.

In Travelers’ fourth quarter report, CEO Alan Schnitzer acknowledged the difficulty of the personal auto business.

“While homeowners profitability remains strong, we are disappointed with the underwriting results in personal auto and are taking pricing and other actions to improve its profitability,” Schnitzer said.

After giant auto insurer GEICO reported a 101.4 combined ratio for the fourth quarter, parent Berkshire Hathaway CEO Warren Buffett noted that industry loss costs are “increasing at an unexpected pace.”  But while these trends have caused other insurers to pull back from writing new auto customers, GEICO is full steam ahead.

“We like to make hay while the sun sets, knowing that it will surely rise again. When insurance prices increase, people shop more. And when they shop, GEICO wins,” he wrote in his annual letter.

Source: Fitch Ratings: U.S. Personal Auto Underwriting Weakens (Pricing Actions Unable to Repel 2016 Deterioration) 

Topics: Personal Insurance