Much like we’ve observed in the Homeowners’ market, Personal Auto in general has been seeing steady rate increases. However, while Homeowners is expected to achieve its third consecutive year of underwriting profits in 2015, Personal Auto has stubbornly remained at a combined ratio of just over 100 during that time.
Combined ratios in Personal Auto for publicly held insurers are slightly higher in 2015 versus the prior year, Fitch Ratings notes in its “2016 Outlook: U.S. Property/Casualty Insurance.” For the industry in aggregate, the ratings agency adds, “Personal Auto statutory results were mired at a modest underwriting loss from 2010 to 2014 and are unlikely to materially change in 2016.”
“Stronger underwriters like Progressive consistently hit their 96 combined ratio target, but the industry as a whole is not making money in Auto,” Jim Auden, Fitch's managing director, tells National Underwriter Property & Casualty. While insurers are getting rate, Auden explains, that increase ends up offset by rising claims.
Auden says it's difficult to pinpoint a reason for the increased claims costs, which had typically been a matter of severity in the past but also included higher frequency in the 2015 third quarter — but more miles driven, along with lower gas prices, certainly have contributed.
What's more, not only has the number of claims increased, but so has the cost per claim, notes State Farm Pricing Director Sara Frankowiak. “The cost of Auto insurance claims has been increasing, and the trends are not showing signs of slowing in the near future,” she says, agreeing that one likely factor pushing the number of claims is the increase in miles driven in the U.S. over the last several years.
Additionally, a recent report from Moody's Investors Service cites increased driver distraction from hand-held devices, increased fraud, higher speed limits in some states, and increased reporting of minor claims because of more leased vehicles and near-record new-car sales.
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“It's nice to be able to point to something, but it's not just one reason,” says Auden, who had expected to see some underwriting improvement over the last few years as rates increased — but that hasn't happened. As a result, he wonders if there could be consolidation in the cards for the Auto insurance industry. Smaller companies, adds Auden, may become marginalized as the investment required to stay competitive from an underwriting standpoint keeps growing.
Part of that higher investment to stay competitive includes more sophisticated toolkits for Personal Auto underwriters. From analytics to telematics to sophisticated models (and perhaps most importantly, the ability to put all of the data available today to good use), significant carrier investments are required in order to gain market leverage. It's a game in which the best defense is a good offense.
“People view pricing sophistication as an offensive move to get the best risks and get the best profits,” adds Auden. “If you don't get more sophisticated, you risk getting adverse selection in your book — and that leads to bigger losses.”
Channel fusion or channel conflict?
Aside from innovations in pricing and product sets, insurers are working to perfect the way they distribute their products. Insurance Information Institute President Robert Hartwig has previously told National Underwriter Property & Casualty he sees “channel fusion” as the future for most Auto insurers, where a company will have capabilities to communicate with consumers in whatever way the customer prefers. That includes direct, on the Web, through an agent, or online through an agent portal.
Many companies already are moving to this model, offering products direct and through an agency network. “We’ve been in this business from a multi-channel perspective for a while now,” says Mick Noland, senior vice president, Product Management at MetLife Auto & Home. “We have our group channel, which utilizes agents and a call-center direct environment; we have independent agents; we have our own MetLife agents; and we now recently started up a direct-to-consumer product as well.
“I would say we share the perspective that this is where the market is headed — and primarily, this is being driven by customers,” Noland adds.
Teri Walsh, principal of the Sachs Walsh Insurance Agency in Westport, Conn., says she understands the concept from an insurer's perspective: “Everyone's just trying to get to customers however they can.”
Agents and other experts do note a difference in the customers choosing agents today versus those going direct. Younger consumers may choose to buy online when they just need to insure their cars and aren't thinking much about insurance beyond that purchase; at later stages in life, when consumers invest in a house and other insurable assets, they choose to discuss coverage options with an agent—and Auto becomes part of that discussion.
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John D’Agostino, principal of D’Agostino Agency Insurance in Hammonton, N.J., describes this phenomenon in his book of business: The customers that were lost to direct writers over the years were typically younger insureds who were after the cheapest price, while the customers he's attracting are buying more — and varied — policies per customer.
Meanwhile, Loree Toedman, vice president, Field Sales at Travelers, says the direct model can actually drive business to agents who understand how, when and where consumers want to do their Auto insurance shopping. “We are seeing more and more consumers start in a digital environment to compare price, then reach out to an agent to provide the expertise and counsel that the consumer needs to make the final purchasing decision,” she notes. “That guidance, combined with digital, video and social engagement, helps our agents because they can leverage our brand and connect with consumers where they are seeking and sharing information.”
Bill Wilson, director of the Virtual University for the Independent Insurance Agents and Brokers of America, adds that multi-channel companies have more or less kept their direct and agency operations separate, although he notes there is angst among some agents who feel their company partners are competing with them.
Says D’Agostino: “Some of our so-called partners compete with us with rates we cannot match, and when that person calls [the insurer] with problems, the company refers them to us,” he says. “The person comes in here and says, ‘Why can't I just get coverage through you?’ And I say, ‘You could, but ours is more expensive,’” even though it's through the same company. “And that drives me crazy, because a so-called partner should not be competing with us.”
For at least one partner he knows of, the direct book of business is performing worse than the commission the company would be paying the agents to help properly vet risks.“I get [that] they want multiple channels of distribution. I just don't understand why they don't have a customer hit the website and then refer it over to agents to write it correctly, and then the numbers are better at the end of the year,” D’Agostino adds.
Noland says communication is the key to making sure channel fusion does not turn into channel conflict. “I think the way we avoid competition [among channels] is to make sure agents are informed throughout the process,” he explains. “It starts with good partnerships with agents. It's in our history, because we do this today already. We partner closely with our agents and provide services [and] back-office support.”
D’Agostino says there are companies providing quality services to help agencies compete in Auto: “We do have companies helping us try to round out accounts, sending us lists of customers where we only have the Homeowners or Auto.” Some insurers, he adds, also send lists of customers the agency has lost, enabling the agent to reach out and try to take that business back. Other carriers, even while trying to attract business themselves on their websites, are adding buttons for consumers to find and contact a local agent.
Likewise, Walsh says companies that use both independent and captive agents are focusing efforts on bundling, which she says is primarily about taking Auto back from direct writers: “That helps a little. But not always.”
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Frankowiak says State Farm — which consistently ranks as the top Auto insurer by market share — keeps its captive agents competitive by providing extensive support and training.
Yet whatever is in store for the profitability of Auto insurance and its distribution method, those at various levels of the Personal Auto business believe there's a future for agents in the line. D’Agostino says there most certainly was a big impact on independent agencies back when direct writers hit the scene, but the agencies that remain can succeed if they’re willing to adapt and provide the proper level of service. Agents have to be available for longer hours today, and they have to take more time with more discerning clients.
“When I was doing Auto back in the ’80s and ’90s, the customer came in, you went through the coverages, they signed the paperwork and they left,” D’Agostino says. “What we’re seeing now is that it may take three visits to the agency” before the customer even buys.
Walsh says that agents’ success in this line today is all about meeting multiple needs for clients, rather than just placing one policy. “I don't know if any agent can be successful primarily focusing on [just Auto],” she says. “The key is to focus on the whole account.”
“I think there's always a place for great agents [in Auto],” adds Noland. “Great agents know their customers and proactively offer products and services. There's always a place for that.”
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