With motorists definitely driving less in the face of higher gasoline prices, the heat is on auto insurers to cut their premium rates, but some warn that regulators and the public should not jump to any conclusions while ignoring other emerging trends.

Indeed, the Property Casualty Insurers Association of America last week said New York's insurance regulator is wrong to assume reduced mileage by auto policyholders will automatically translate into lower claim costs.

PCI's statement came after New York Insurance Superintendent Eric Dinallo convinced the state's biggest auto insurer, GEICO, to withdraw a rate increase request for most of its local companies.

Mr. Dinallo cited the impact of higher gas prices on the number of miles New Yorkers drive. But PCI said there is not necessarily an impact on claims because repairs cost more and frequency was trending downward even before gasoline costs spiked upward.

That contention was backed up by a report from San Francisco-based Quality Planning Corp., which--despite projecting a mileage-driven decrease of 4-to-5 percent over the next 12 months--also warned that increasing repair costs may keep auto insurance rates from declining.

QPC--a unit of the Jersey City, N.J.-based Insurance Services Office that validates policyholder information for auto insurers--said drivers expecting to see lower insurance premiums because they cut their mileage "may be in for a surprise."

The price of oil, the firm noted, "has had a similar dramatic impact on the parts that go into our cars and trucks," pointing out that petroleum is used in rubber, plastic and polyester parts, making them more expensive to produce.

"These higher costs will be reflected in higher loss severity and, as a result, will act as a counterforce to the reduction in annual mileage," the firm said.

In the face of such evidence, "we are encouraging the [New York] superintendent to not draw overly broad conclusions based solely on assumptions being drawn by consumer groups regarding the number of miles driven," said PCI's regional manager and counsel, Paul Magaril.

While he is pushing for rate decreases, Mr. Dinallo said he understands there may be other factors involved, and that the department recognizes auto insurance losses have been increasing recently.

"We are not making a prejudgment, but we do expect insurance companies to explain the rate impact of higher gas prices and the resulting dramatic reduction in driving we are seeing in the latest federal statistics. We will take that into account as we evaluate rate increase requests," he said.

PCI, in its statement, said it has done a study of its own showing public policymakers should be cautious in isolating one factor, such as the number of miles driven, and then concluding auto insurance premiums should be reduced.

"While there is solid evidence that the high price of gas has reduced the number of miles driven, it would be a mistake to assume that this means there will be lower insurance claims reporting, and as a result, lower insurance premiums for consumers," according to Mr. Magaril.

Mr. Magaril said while PCI supports insurers taking a look at data regarding miles driven, "there are many factors that determine what a consumer will pay for their auto insurance. As a result, it is necessary to explore in detail the trends of all of the various factors that have an impact on auto premiums that consumers pay."

He added that PCI's analysis of auto claims in New York and across the country "shows that while the number of claims reflecting vehicle damages has been reduced, it is more costly to repair vehicles today." PCI said average claim costs in New York have increased by nearly one-third since 2000. "Unless claim costs are reduced, it would be unreasonable to expect insurance premiums to drop," said Mr. Magaril.

According to data gathered by the Federal Highway Administration from state highway agencies, the total number of vehicle miles driven during the 12-month period ending March 2008 (2.99 trillion) fell 0.8 percent compared to the previous 12-month period.

But PCI's assistant vice president of research, Diana Lee, said that "while this results in fewer miles driven, we found that this is only part of a larger trend toward fewer accidents. Our study showed that the recent surge in gasoline prices does not appear to be the cause of generally declining claim frequencies."

PCI research determined, she added, that "the rate of claims was dropping even during the early 2000s, when gasoline prices were less than half of today's cost."

Therefore, she added, "based on the data, it cannot be said that the recent surge in gasoline prices is the cause of generally declining claim frequencies in New York, especially when frequencies have shown a slight increase over the last five quarters."

From the first quarter of 2000 to the first quarter of this year, claim frequency has fallen by 11.6 percent--but severity jumped by 31.6 percent, and loss costs have risen 16.4 percent, according to PCI, which said its member companies write 51.4 percent of the U.S. auto insurance market.

QPC said auto carriers "must focus their pricing and products to address the consumer's emerging switch to new vehicle designs, new household vehicle mix, new driver usage patterns and a changing underlying cost structure."

In any case, the cutback in miles driven by New York motorists as a result of higher gas prices convinced at least one carrier--GEICO--to agree to withdraw a rate hike request for most of its policyholders in New York, where it is the state's largest writer of auto insurance.

GEICO declined to provide any figures, and an insurance department representative said regulators could not cite actual numbers. "It's confidential until we approve [a rate request], and since they withdrew it, it's confidential," the official said.

However, he added, the request was "not insubstantial," and applied to 75 percent of GEICO's New York business. A third, smaller GEICO company, he said, will be resubmitting a lower request.

Mr. Dinallo, in a statement, said other auto insurers with rate filings before the department are now required to assess the impact of reduced driving on their rates and rate requests under a bulletin the department issued this month.

"Paying more to gas up your car may mean paying less to insure it," Mr. Dinallo said. "Higher gas prices lead to less driving, and as New Yorkers drive less, the number of accidents should go down."

Fewer accidents should mean lower auto claims costs for the insurance companies, and he said his job is to make sure these savings are passed on in the form of lower rates for New York drivers.

GEICO, Mr. Dinallo said, "is to be commended for its decision to withdraw its rate increase request based on how changes in driver habits in New York affected its recent loss experience. We hope other insurers will also carefully evaluate the effects of reduced driving in New York."

The regulator said he has had a concern about an upward trend in some of the recent rate filings his department received that may not fully take into account the impact of high gas prices on New York drivers.

Special Reports /

Auto Insurers Challenge Call For Lower Rates After Gas Hikes Cut Mileage

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