The auto insurance industry has been grappling with a significant challenge – a surge in the inflation of auto claims that’s outpacing the growth of auto insurance premiums.
A recent study conducted by the American Property Casualty Insurance Association (APCIA) sheds light on the alarming trends that have contributed to this situation. In this blog, we dive into the key findings of the study, explore the factors driving claims inflation and understand how they impact insurers and policyholders alike.
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Rising Auto Claims Inflation and Its Causes
The APCIA study highlights a crucial observation: insurance auto claims inflation has been increasing at a faster rate than the overall consumer price index (CPI). This, in turn, has outpaced the growth of auto insurance premiums. The Insurance Journal identifies several factors contributing to this phenomenon:
Economic Inflation
The overall rapid economic inflation in recent years has been a driving force behind the surge in auto insurance losses. Coupled with claims inflation, this has put immense pressure on the insurance industry’s combined ratios.
Changing Driving Patterns
The pandemic-induced changes in driving patterns have had lasting effects. Despite the gradual recovery from the pandemic, miles driven have not returned to pre-pandemic levels. Factors such as high gas prices and continued work-from-home policies have contributed to this situation.
Impact on Auto Insurance Claims
Surprisingly, the study found that even with fewer miles driven, the severity of U.S. private passenger vehicle damage claims has risen significantly. From 2018 to 2022, average property damage liability and collision claim costs increased by nearly 50%. This increase is primarily attributed to rising auto repair and labor costs, inflation and an uptick in theft rates.
Additionally, the study noted a 40% increase in average bodily injury claim severity over the same period. This acceleration is attributed to escalating medical inflation, the abuse of legal systems and a sharp rise in fatal motor vehicle crashes.
Consequences for the Insurance Industry
The escalation of claims inflation has had profound consequences for the private U.S. property and casualty insurance industry. The study reveals that losses on underwriting in 2022 reached a staggering $25.6 billion. This is more than double the losses in the previous year and the highest since 2011.
Moreover, the industry’s aggregate net worth experienced a 6.9% decline from year-end 2021, amounting to $73.1 billion. This decline is the most significant percentage drop since the “Great Recession” of 2008.
Challenges in Premiums and Loss Ratios
To mitigate the impact of rising claims inflation, insurers have sought to increase premiums. However, personal auto premiums increased by only 6% in the face of escalating losses, which surged at a much higher rate of 24%.
The direct loss ratio for private passenger auto insurance hit 80.2% in 2022, excluding loss adjustment expenses. This represented an increase of 12.2 points from 2021 and a notable 24.1 points from 2020 – indicating the challenges insurers face in managing claims costs.
Preparing for the Future
APCIA’s report emphasizes the need for a proactive approach to tackle the issues posed by auto claims inflation. Insurance companies are actively advocating for better infrastructure, including reliable supply chains for auto parts and safer roads. By reducing crashes and claims costs, these measures can help keep insurance premiums affordable for consumers.
Furthermore, insurers are encouraging policyholders to adopt safer driving habits and avoid risky behaviors that could lead to claims. Monitoring the situation closely, insurers may be compelled to pass on increased loss costs to policyholders as claim expenses continue to rise.
Moving forward, it becomes crucial for insurers and their policyholders to work in tandem to address the underlying causes and find effective solutions. By understanding the factors driving claims inflation and implementing safety measures and investing in infrastructure, we can navigate the uncertain road ahead and ensure a more sustainable future for the auto insurance sector.
To discover expert strategies for decreasing claims frequency, combatting inflation and improving your profitability as an insurer, download our white paper, “Can Deeper Data Insights Save the Commercial Auto Insurance Industry?”.
