Best’s Special Report: Personal Auto Insurers Regain Traction as Combined Ratio Improves

The U.S. private passenger auto segment has experienced a turnaround after weakened performance in 2015-2016, as rate actions and underwriting initiatives resulted in a 3.8-point year-over-year improvement in the sector’s combined ratio in 2017, as well as a 4.7-point loss ratio reduction through third-quarter 2018, according to a new AM Best report.

The Bests Special Report, Personal Auto Insurers Regain Traction as Combined Ratio Improves, states that a 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.

Unlike frequency trends, 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, driving up liability and physical damage severity. Over the last two years, 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. 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. Innovation also plays an essential 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% to $112.5 billion as of third-quarter 2018, and AM Best believes insurers will need to continue to innovate to anticipate future frequency and severity issues appropriately.

Insurers also need to consider other issues that arise out of a sharing economy and the changing needs of the insured, as well as the eventual increased use of autonomous vehicles. Companies that can use technology to create operational efficiencies while optimizing the customer experience will be best-positioned to succeed. AM Best believes those 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 supports AM Bests stable outlook on the sector.

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Samuel Hanig, ACAS
Senior Industry Research Analyst
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Raymond Thomson, CPCU, ARe, ARM
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Christopher Sharkey
Manager, Public Relations
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Jim Peavy
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