Personal Auto Insurance Business Performed Better in 2017: A.M. Best

February 1, 2018

The underwriting profitability of the U.S. personal auto line showed signs of improvement in 2017 as rate hikes have been effective against loss frequency and severity trends, according to a new A.M. Best report.

The combined ratio for the U.S. private passenger standard auto composite (companies with private passenger auto net premiums written that constitute 50 percent or more of their total net premiums written) at the end of third-quarter 2017 had improved by 4.3 points to 101.6 from third-quarter 2016, according to the Best’s report, titled, “Personal Auto Showing Signs of Improvement.”

The total industry’s private passenger auto combined ratio has deteriorated every year since 2013, and in 2016, had slipped to 105.9, driven by a 2.6 point jump in the loss and loss adjustment expense ratio, although the expense ratio improved by 0.8 points.

Private passenger auto liability reserves have been eroded by increases in frequency and severity over a prolonged period of time. Reserves began to develop less favorably in 2012 and were developing adversely by 2015. According to A.M. Best’s analysts, some of the 2015 adverse development can be attributed to late development in multiple prior accident years, but the report states that the 2016 adverse development can be blamed almost entirely on the 2015 accident year. A.M. Best believes setting 2016 accident-year reserves more conservatively “should stop some of the bleeding and improve future calendar-year profitability.”

Insurers continued to aggressively raise rates in 2017, and they have tightened underwriting standards, noting they are comfortable losing customers with larger losses and higher frequency, according to the report. The rise in severity has been somewhat offset by a slowdown in frequency has helped offset the rise in severity. The rise in severity is due largely to an increase in new vehicle purchases and a rise in repair costs. In addition, motor vehicle fatalities per 100,000 people rose in 2015 and 2016, marking the first time since 1994 and 1995 that the fatality rate has increased in consecutive years.

Higher employment and increasing gas prices in 2017 contributed to a flattening of loss frequency trends. Comprehensive losses will be higher in 2017 because of widespread damages resulting from the numerous natural catastrophes; however, underlying metrics show that private passenger results are trending in the right direction.

A.M. Best said that while personal auto insurers always need to address frequency and severity trends for this business to remain profitable, they also need to focus on price adequacy and technological advancements. “Doing so will decide which companies remain competitive and relevant in the long term,” A.M. Best said.

Source: A.M. Best

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