Pandemic Boosted Personal Auto Insurers’ Profits in the Short-Term

As bad as the coronavirus pandemic has been for many insurance lines, personal automobile profits have soared thanks to reduced driving, as quarantines and shelter-at-home restrictions took hold across the United States earlier in 2020, Fitch Ratings said.

“Commercial [insurance/reinsurance] underwriting profits in the personal auto line have sharply increased as reduced driving led to unprecedented reductions in claims frequency” in the first half of 2020, Fitch noted. “This has offset higher incurred losses related to the ongoing coronavirus pandemic in multiple segments, ranging from business interruption to professional liability and workers’ compensation. As such, virus-related effects on consumer behavior have had a positive impact on first-half 2020 auto insurer earnings.”

That’s not going to last, however, as Fitch noted.

The recent improved short-term performance of auto insurers is unsustainable, and we expect profit challenges in the future as regulatory and competitive pressures hinder any rate increases when losses return to historical norms,” Fitch said. “Driving activity is now increasing. While the timing remains uncertain, frequency of claims will eventually move toward traditional levels, and loss severity moves perennially upward for auto insurance.”

In the short term, a slowdown in pandemic-related driving has made a huge impact. According to Fitch, personal auto results for the 2020 first half for eight publicly trade insurers that disclose product results in GAAP reporting showed a 6.5-point decline in the segment combined ratio to a highly profitable 85.5.

Information from three major personal auto writers (Allstate, GEICO and Progressive) indicate that claims frequency was down approximately 30% at mid-year 2020 for physical damage and bodily injury claims, while loss severity is up by approximately 10% or more for these coverage classes.

Net written premiums for this group declined by 2% for H1 2020 compared to the previous year. Underwriters have responded to this recent reduction in risk exposures by offering premium returns, renewal price rebates, and policyholder dividends. Fitch estimates that these actions are worth $12 billion to date and will grow further throughout the year.

Fitch notes that for accounting purposes, most of the premium adjustments will be recognized in future results. At the same time, the claims benefits from frequency reductions significantly outweigh the value of any premium reductions, Fitch said.

There are more rate reductions to come in the near term, based on underwriters’ regulatory filings. That, in turn will produce more decline in auto insurance revenue. Fitch’s full report is “Auto Insurer Profits Driven by Record Drop in Claims Frequency.”

Topics Carriers Auto Profit Loss Claims Personal Auto COVID-19