The unprecedented effects of the COVID-19 pandemic are far from over. Countless industries are still struggling to maintain profitability – including the personal and commercial auto insurance businesses. According to S&P Global Market Intelligence’s 2022 US Auto Insurance Market Report, insurers have worse-than-expected projections for underwriting results in 2023. The report states that “the private and commercial auto insurance businesses [are expected] to continue to generate low returns relative to many other key P&C lines due to factors such as price inflation, social inflation and rising claims frequency back towards pre-pandemic levels.” We break down each of these three factors affecting auto insurers’ loss costs below.
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3 Factors Affecting Auto Insurers’ Loss Costs
Following the impact of the pandemic in 2020, consumer and business demand increased as the economy rebounded. Even though demand rose, supply chain problems severely impacted the auto industry. A global semiconductor shortage slowed auto manufacturing, creating a reduced supply of cars.
This caused new vehicle prices to skyrocket. Prices for auto parts and equipment rose 22.8% between 2021 and 2022, while the cost of used cars and trucks rose 14%. Repair costs and cycle time have both increased exponentially as well, with the average length of rental (LOR) for collision replacement-related rentals up nearly six full days over the past 24 months. Shops’ backlogs are at a record high, with nearly one in five shops (18.5%) scheduling more than eight weeks out. This is a percentage that had never exceeded 2% until this year.
As these costs continue to rise, insurance carriers’ underwriting profit margins are taking a huge hit. In 2021, inflation contributed to a historic $30 billion increase in loss costs across the insurance industry. The above supply chain disruptions and other causes of inflation in the automotive industry also led to an estimated $9 billion in loss costs for auto physical damage in 2021. The high prices for these core commodities drove up loss costs in commercial insurance specifically by $2 billion and $8 billion for personal insurance in 2021.
Social inflation is when insurers’ claims costs rise above general economic inflation, driving higher insurer claim payouts and loss ratios.
The auto insurance space has been particularly impacted by social inflation. According to S&P Global Market Intelligence’s report, “social inflation has served as a key driver of commercial auto liability losses and what has seemed to be a perpetual need for large rate increases.” This is mainly due to trends such as the surge in costly lawsuits and subsequent settlements brought on by increasing claims frequency and severity.
In 2019, the number of U.S. verdicts resulting in $20 million or more was up more than 300% from the annual average from 2001 to 2010. Commercial auto specifically has seen settlements regularly surpass $10 million.
As these verdicts continue to grow in both cost and frequency, excessive insurance claim expenses and social inflation issues are likely to result.
Rising Claims Frequency and Severity
Throughout the pandemic, more remote work and less traffic congestion opened highways up to dangerous driving behaviors, creating a higher severity of collisions.
There was strong hope that the rise in collisions would gradually fall back down to pre-pandemic levels in 2022. But The National Highway Traffic Safety Administration (NHTSA) reported that in the first quarter of 2022, U.S. traffic deaths jumped about 7%. This is the highest recorded quarter in 20 years.
Much of this has been caused by an increase in distracted driving, with more and more drivers diverting their attention to cell phones, eating, talking to a passenger, driving while fatigued and more. Distracted driving causes approximately nine deaths and 1,000 injuries per day in the U.S, and this number only continues to grow.
This is also a disproportion between newer and older, poorly-maintained vehicles out on the road that are creating unsafe driving conditions. A study of 2,000 American car owners found that 25% of drivers feel they “take a risk each time they hit the road, as their vehicle is currently in need of repair or no longer runs well.” It was reported that 68% of the drivers in this study had at least one current issue with their vehicle that likely required attention.
This rise in frequency and severity is a large contributor to the troubling increase in claim losses for carriers.
How Carriers Can Combat the Rise in Expensive Auto Claims
These challenges aren’t new to the auto insurance industry – carriers have faced over a decade of loss ratios. So how can the industry combat them?
To learn how you can implement strategies that will help decrease claims frequency, combat inflation and improve your profitability as an insurer, download our white paper, “Can Deeper Data Insights Save the Commercial Auto Insurance Industry?”.