The Challenge with Personal Auto Insurance
What Auto Insurers and Indpendent Agents Need to Know
Personal auto has generated poor results in recent years, and for many it’s not surprising. Factors that have contributed to the decline include more cars on the road driving further, increased medical costs, higher repair costs for newer vehicles, and distracted driving. “The industry enjoyed a long period of low claims frequency and mild severity. As the U.S. emerged from the Great Recession, claims frequency began to increase. Insurers reacted by raising rates, but then, more recently, severity spiked,” according to Jim Lynch, chief actuary and vice president of research and information services at the New York City-based Insurance Information Institute.
How Frequency and Severity Play a Part
The frequency and severity of auto accidents hit the personal auto insurance industry hard. Responsibility for increased frequency has been placed on people returning from work as the economy recovered after the Great Recession. About 40 percent of miles driven occur during daily commutes, with many accidents occurring during rush hour, according to Lynch. As people lost jobs during the recession, fewer cars were on the road. Lower gas prices have also increased the amount of traffic on the road. As a result, frequency increased more than 7 percent between 2013 and 2015, according to white paper released in October 2016 by the Insurance Information Institute.
While frequency has slowed since 2015, auto insurers have seen severity increase 5 percent annually over the past two years. Tyler Asher, president of Safeco Insurance cites a jump in fatalities, higher medical costs and costlier vehicle repairs as the reasons behind the increased severity.
The Cost of Repairs
In a Q4 presentation, Liberty Mutual compared repair costs for minor front-end damage on the same make and model for entry-level sedans built in 2014 and 2016. The 2014 model cost $1,846 to repair, while the 2016 model cost almost double at $3,551, according to the presentation. Tracy Dolin-Benguigui, director at S&P Global Ratings believes it’s not only the higher costs to repair new technology in cars, but the specialized labor required to fix sophisticated technology that’s raising the overall cost of vehicle repairs.
Less Safety
New safety features in today’s cars haven’t translated into safer driving according to Dolin-Benguigui. Industry professionals believe distracted driving is contributing to the frequency and severity of auto accidents – not just from drivers texting and driving but from the growing number of gadgets in vehicles. “More people are driving more miles, so there are more distracted drivers for longer periods of time on the road,” says Neil Alldredge, senior vice president, Corporate Affairs, for the National Association of Mutual Insurance Companies (NAMIC).
If there’s one take away for personal auto, it’s that auto tech will continue to play a major part, both on the insurance side and with respect to vehicles covered. Insurers will need to find new ways to underwrite risks and insure and engage with customers. For independent insurance agents, industry experts suggest using comparative raters to help them stay competitive with direct writers and captive agents in terms of how quickly they are able to turn around quotes.