Signs Point to Better New Year for Nonstandard Auto Insurance Market

December 21, 2018

There are initial signs that the private passenger nonstandard automobile segment is beginning to improve after years of unfavorable results, including continued premium growth in 2017 and through mid-year 2018, according to A.M. Best.

Best’s Market Segment Report, “Early Signs of Improvement in Nonstandard Auto Market,” states that one sign is the combined ratio for the private passenger nonstandard auto insurance companies followed in its report improved to 102.2 in 2017, compared with 107.9 in the previous year and a 10-year average of 106.5.

The recent improvements reflect a variety of carriers’ underwriting initiatives, including increasing rates significantly over the last few years. As the auto premium base expanded in 2018, loss cost trends and severity increases have mostly been in line with companies’ expectations.

The composite’s first-half 2018 combined ratio is more than five points lower than the full-year 2017 combined ratio.

The insurers in this report also continued to generate pretax and net income through the first half of 2018, with first-half earnings that more than doubled year over year.

Nonstandard auto policies typically are offered to drivers with risk factors that make it difficult, if not impossible, to obtain insurance at standard or preferred rates. These policies are customized to policyholders’ specific needs and pricing and terms can vary widely.

Some large national private passenger auto insurers have expanded their presence in the nonstandard auto insurance market through more efficient technology platforms. The resulting competitive pressure on smaller writers has resulted in some being acquired by national writers.

Underwriting results were particularly poor in 2015-2016, reflecting higher incurred loss costs and higher repair costs for vehicles with cameras, sensors and other advanced technologies, as well as escalating medical costs on bodily injury claims. A greater number of miles being driven, in part because of lower gas prices, and a greater percentage of distracted drivers, also have played roles in the unprofitable results.

A.M. Best said it believes the recent trends are indicators that the number and magnitude of rate increases can be expected to subside somewhat over the near term, especially given the high level of competition in the personal auto market. However, medical severity and auto repair costs for increasingly complex cars are likely to continue rising.

While there are positive sigs, the report notes that a change in auto frequency, positive or negative, can have a noticeable impact on the underwriting profitability of automobile-related lines. In addition, nonstandard auto premiums generally decline during recessionary periods, with the resulting drop in the premium base hurting profitability.

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