Rates, Lower Loss Frequency, Innovation Drove Personal Auto Market Turnaround

March 29, 2019

After a weakened performance in 2015-2016, the U.S. private passenger auto segment has turned around as rate actions and underwriting initiatives have driven a 3.8-point year-over-year improvement in the sector’s combined ratio in 2017.

A 4.7-point loss ratio reduction through third-quarter 2018 has also helped.

That’s all according to a new A.M. Best report, “Personal Auto Insurers Regain Traction as Combined Ratio Improves.”

The leveling of loss frequency helped to drive the stronger performance in 2017-2018, with market leaders in this line of business reporting lower year-over-year frequency metrics. Oil and gas prices also began to trend upward in 2018, and seasonally miles driven per year tapered off. Miles driven has grown tremendously since 2013-2014; however, the rate of growth has lessened in each succeeding year since 2015. Factors that could signal a return to frequency growth include a longer average commute time (i.e., the propensity for auto accidents and claims increases when commuters are on the road longer) and increased instances of distracted driving due to busier dashboard designs and mobile devices.

But not all trends have been beneficial.

Loss severity continues to escalate, as higher motor vehicle repair costs on more newer and larger vehicles, medical care costs and funeral-related expenses continue to outpace growth in the consumer price index. These factors are driving up liability and physical damage severity.

Over the last two years, insurance companies also have reported higher-than-usual catastrophe losses, which have driven up claims costs as well.

Private passenger auto insurers’ innovation efforts have been reflected in an improved expense ratio, which experienced a 0.8-point drop in 2017. A.M. Best says auto insurance writers have used innovation to aid in the predictability of their results, and over the past 10 years, private passenger auto liability and auto physical damage have had the lowest standard deviation of loss ratio results among the top 10 property/casualty lines of business.

According to A.M. Best, innovation has also played a role in improving the customer experience, which in turn can lead to greater policy retention, bundling rates and new policy quote conversions. Direct premiums written increased year over year by 7.1 percent to $112.5 billion as of third-quarter 2018.

A.M. Best said it believes insurers will need to continue to innovate to anticipate future frequency and severity issues appropriately.

Companies that can use technology to create operational efficiencies while optimizing the customer experience will be best-positioned to succeed., according to the report, which also maintains that insurers will also need to address the sharing economy, as well as the eventual increased use of autonomous vehicles.

A.M. Best believes carrier that “do not possess the scale, expertise or technological capabilities to keep up with the rapidly evolving landscape may be at risk of losing relevance.”

Still, the industry maintains strong risk-adjusted capitalization, along with sustained investments in technology, an aggressive implementation of underwriting initiatives and evolving enterprise risk management practices, which A.M. Best says supports its stable outlook on the sector.

Source: A.M. Best

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