Auto insurers may have seen a recent decrease in losses, but they will still need to increase their rates to keep ahead of inflationary loss costs, a financial analyst said.

In an analyst's note, Meyer Shields with Stifel Nicolaus said its review of rates, based on the Insurance Services Office statistics, finds that despite a drop in claims, as economically impacted policyholders drive less, loss costs are rising by less than 3 percent annually.

Mr. Shields said it seems clear that insurers are benefitting from the weak economic environment, which is reducing claim frequency by suppressing driving and also moderating overall severity as the costs of new and used cars (included in the calculation of many physical damage claims) decline. That implies underwriting profits will stay above the levels anticipated when current rates were determined.

Despite these moderating factors, he continued, overall positive loss cost inflation suggests rate increases will continue. Unprofitable companies will need bigger increases, but insurers currently at or near their break-even points will also soon need to make increases.

Rate increases should stimulate price shopping, he said, especially in the current economy, which should drive more policies toward larger carriers that can underprice their competitors by virtue of economies of scale.

Loss cost inflation would almost be significantly worse without the “benefits” of the weak economic environment, he continued.

Whenever these external factors fade, there is likely to be disruption in the marketplace. Carriers that recognize the coming change early will benefit by making rate adjustments.

Stifel Nicolaus said it will keep buy ratings on Allstate, Progressive, The Hanover Group, Donegal and Erie, saying it has the analytics and the “cultural discipline needed to maintain rate adequacy.”

However, it reiterated its sell rating on the shares of Mercury General, because of “its overexposure to the California market's difficult regulatory environment. With rate cuts now flowing into earned premiums for both auto and home, we expect [Mercury General's] California underwriting margins to steadily deteriorate.”

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Analyst Sees Auto Rates On The Increase

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