Personal-auto insurers have continued to implement rate increases to counter weakness in the segment's performance over the last several years, but unusual catastrophe losses and rising claim severity prevented strong improvement in underwriting performance for 2012, says Fitch Ratings.

In a recent analysis, “Personal Auto Underwriting Performance,” Fitch says, “While market fundamentals in the personal auto industry improved modestly in 2012, results vary considerably across companies.”

A chart outlining 10 auto insurers' combined ratios in 2011 and 2012 shows five carriers reporting improved figures in 2012 while five reporting some deterioration.

Part of the volatility was weather related. Fitch says, “Natural catastrophe related losses rose inordinately in 2012 due to Superstorm Sandy in the fourth quarter. The large flood related losses in densely populated areas led to higher auto related claims than past storms boosting auto insurers' combined ratios.”

The ratings agency adds, “The industry experienced severe weather conditions in several areas of the country during each of the last three years. Hail storms, tornadoes, wind, and flooding contributed to catastrophe losses each year, as well as Superstorm Sandy in late 2012 and Hurricane Irene in 2011. In contrast to homeowners' insurance, auto insurance with comprehensive coverage typically covers damage caused by flood. As a result, Sandy led to higher levels of auto losses than past storms.”

The report also notes that auto insurers are dealing with rising claims costs, due mostly to rising severity for bodily-injury claims. “Many auto writers experienced mid-single-digit increases in severity during 2012, following a more modest uptick in 2011 and near flat claims severity in 2010,” says Fitch. “According to the Bureau of Labor Statistics, the cost of medical-care services increased 3.1 percent during the 12-month period ending January 2013, which leads to higher bodily-injury-claim costs for insurers.”

Fitch adds that the Hanover Insurance Group has attributed higher industry severity trends to longer duration and slower development of claims due to litigation in a depressed economy. Fitch says it believes claims severity will likely continue to present challenges as medical inflation outpaces general inflation.

On a positive note for insurers, claim frequency has been flat to down during the past three years. “Several factors can influence the degree or direction of claim frequency trends, such as the number of vehicles per household, miles driven, gasoline prices, greater vehicle safety, and unemployment rates,” says Fitch.

Should catastrophes revert to historical norms, Fitch expects pricing improvements to promote “a modest underwriting profit in 2013.”

As for the segment's top writers, Fitch says that “State Farm continues to dominate the market with approximately 20 percent of auto premiums, nearly double the second largest writer, The Allstate Corp.

Special Reports /

Despite Rate Increases, Strong Underwriting Improvement Elusive for Auto Insurers

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