For those in the insurance industry and those who observe it,the reasons behind the poor results for personal auto in recentyears are no mystery: more cars on the road driving more miles,higher medical costs, higher repair costs for newer vehicles and —while difficult to estimate its precise effect — distracteddriving.

The degree of impact these factors have had on frequency andseverity trends, however, has perhaps caught many insurers offguard. Jim Lynch, chief actuary and vice president of research andinformation services at the New York City-based Insurance InformationInstitute, says the industry enjoyed a long period of lowclaims frequency and mild severity. As the U.S. emerged from theGreat Recession, claims frequency began to increase. Insurers reacted by raising rates, but then,more recently, severity spiked.

Frequency & severity punches

As Lynch puts it, the industry was “hit from the left” onfrequency, began to recover, but then hit with a “big roundhousefrom the right” with severity.

The increase in frequency stems mostly from people returning towork in the (albeit slow) economic recovery. Lynch notes about 40percent of miles driven occur during daily commutes, with many accidents occurring during rush hour.During the recession, as people lost jobs, fewer cars were on theroad — a trend that's reversed in recent years. Lower gas priceshave also encouraged drivers to hit the road more often. Theresult: frequency increased by more than 7 percent in the threeyears from 2013 to 2015, according to an October 2016 InsuranceInformation Institute (I.I.I.) white paper, “Personal Automobile Insurance: More Accidents,Larger Claims Drive Costs Higher.”

Lynch and others note the rise in frequency has moderated since2015, but even if insurers could take some solace in that, the morerecent uptick in severity causes concerns of its own. Tyler Asher,president of Safeco Insurance, says severity for the industry is upby about 5 percent annually over the past two years. He cites a jump in fatalities (the I.I.I. whitepaper notes an 8 percent rise in fatalities in 2015), highermedical costs and costlier vehicle repairs as reasons.

Repair costs

On that last factor, Liberty Mutual, in its Q4 results presentation,compared repair costs for minor front-end damage on the same makeand model 2014 and 2016 entry-level sedan. The 2014 model cost$1,846 to repair, while the 2016 model cost nearly twice as much at$3,551.

Tracy Dolin-Benguigui, director at S&P GlobalRatings, discussing the Liberty Mutual comparison, says theissue isn't just the higher costs to repair new technology in carssuch as sensors and other systems, but also the need forspecialized labor as technology becomes more sophisticated.

Of course, all of the new technology is designed to save livesand avoid crashes, which in theory should lower costs forinsurers. “Long term, we do believe there are tremendous benefits,”says Asher. But in the near term, he says there are escalated costsassociated with new technology in vehicles. Speaking strictly froma claims-cost perspective, he says the tipping point at whichsavings from safety improvements outweigh the higher cost oftechnology may be years away.

Less safety, increased severity

Dolin-Benguigui says the new safety features have not necessarily translatedinto safer driving in the U.S.; she says that could be becausedrivers may be circumventing these features through distractionsand perhaps not paying as close attention to the safety features asthey should.

It would be a challenge to find anyone among industryprofessionals, lobbyists and observers who doesn't believedistracted driving is contributing to the frequency and severityenvironments — not just from texting and driving but from theincreasing number of gadgets in vehicles. As Asher notes, though,it's difficult to estimate the exact cost. But, he adds, “Webelieve it's on the rise and is adversely impacting trends.”

Neil Alldredge, senior vice president, Corporate Affairs, forthe NationalAssociation of Mutual Insurance Companies (NAMIC), notes thatdespite the vast majority of states having some kind of distracteddriving law on the books, the problem is increasing. “At the sametime,” he adds, “more people are driving more miles, so there aremore distracted drivers for longer periods of time on theroad.”

The net effect of these frequency and severity trends is apersonal auto market that, according to Moody's 2017 personal linesOutlook, hasn't had an accident-year combined ratio under 100 since2008. It climbed to its highest point over that span in 2015, at104.5, and is estimated to be 104 in 2016, Moody's Personal LinesOutlook shows. That high combined ratio is not for lack of rateincreases, at least when considering the industry as a whole.Moody's, citing SNL Financial data, shows insurers in personal autohave steadily raised rates since 2010, even taking a higherpercentage increase than the homeowners line in 2015, when autorates climbed 5 percent.

2015 results worse than anticipated

When asked why the rate increases up to now have not gotten theindustry out in front of the loss trends, Fitch Ratings ManagingDirector Jim Auden says, “We thought they would have caught up abit in 2016,” and he adds a few factors worked against insurers. Hesays somewhat higher car losses in personal auto this last year mayhave added about a point to the industry loss ratio. He also says2015 results turned out worse than anticipated, with some companiesreporting adverse development in the line.

Dolin-Benguigui questions whether enough insurers are pushingfor the rate increases they need, perhaps fearing that they willlose customers in what remains a highly competitive environment.She points to the popular strategy of bundling auto and homeownerscoverages, noting that if an insurer loses a personal auto customerbecause of higher rates, it may also lose that customer's moreprofitable homeowners business. The reluctance by these insurers topush for needed increases prolongs the time it takes to get on topof the loss trends. “It could take as long as the next threeyears,” she adds.

Wide disparity in results

Auden notes there is wide disparity in company results, withsome major insurers holding strong with combined ratios under 100,while others stray well above that mark. He says the more successful companies are leveragingtechnology to stay ahead of competitors on both the claims andunderwriting sides of the business.

Some agent representatives question whether those companies'lower combined ratios can be attributed solely to superior underwriting. Inan age where auto insurance is largely perceived to be mostly aboutprice, some agents wonder whether companies' combined ratios maybenefit from the sale of cheaper policies with lower coveragelimits, thereby limiting how much those insurers pay out in claimseven if the loss event itself is costlier.

Chris Boggs, executive director of the Big I Virtual Universityat the Independent Insurance Agents and Brokers ofAmerica (IIABA), declines to speculate, but notes there is notmuch difference in premium between a minimum-limits policy and apolicy with higher limits. Essentially, insurers sacrifice only abit of premium by selling policies with lower limits but couldpotentially save a lot on claim payments.

Lynch points out the industry's combined ratio as a whole isgoing up, rather than down. For those companies achieving morefavorable results, he says one factor could be the markets in whichthey operate. “If a company is under 100 consistently with the waythe market is today, that they're doing something to create asuperior underwriting result,” he says.

Continued … 

Farther on up the road

Meanwhile, conditions are expected to remain challenging forinsurers in the near term. Dolin-Benguigui says the market is in aclassic hard cycle now, with rate increases of 8 percent to 12percent expected in 2017. Some insurers — those that have beenincreasing rates for a while — may have weathered the worst of thestorm, she says, but she also notes some of the adverse trends maynot be just short-term blips or cyclical in nature. She expects thepoor personal auto environment to continue pressuring broaderindustry results — perhaps pushing the industry's overall combinedratio above 100.

Auden says Fitch likewise sees further rate increases coming in the near term.“We would attest there could be some improvement in 2017 results,but it's from a very poor level in auto.” He says insurers mayencounter some regulatory pushback in certain states as they try totake more rate increases. Alldredge says regulators are “morerooted in this mentality that insurers must be doing somethingwrong, or insurers must be trying to disadvantage theirpolicyholders by raising their rates rather than looking at what isactually driving the rate side of this.”

Getting on top of loss trends

Lynch takes a more optimistic view, saying he believes insurersare getting on top of the loss trends. “They'll get there,” hesays, noting it might be in 2017. “I'd like to think that's whenthings will calm down on the loss-cost side. When that calms down —when frequency peaks out — you'll see a much tamer situation.”

If there's one certainty for personal auto, it's that technologywill continue to play a major role, both on the insurance side andwith respect to the vehicles covered. Additionally, insurers willfind new ways to underwrite risks and insure and engage withcustomers.

With respect to policy innovations, Asher expectstelematics-based policies to play a bigger role in the near term,while Dolin-Benguigui says pay-by-mile coverage that incorporatesmobile-app technology could gain more traction.

On the distribution side, speed continues to be the name of thegame. For independent agents, some experts say comparative raterscould help them stay competitive with direct writers and captiveagents as far as how quickly they are able to turn around quotes,especially in a landscape where faster and cheaper appear to reignsupreme, even if agents wish that was not necessarily the case. “Asmuch as I hate to say it, I think auto insurance has become acommodity,” says Boggs. He stresses, “It is not a commodity, but ithas been forced into that hole.”

Use of tech in underwriting

With respect to underwriting, Auden, who cites the use oftechnology in underwriting as a reason why some insurers haveoutperformed peers, also sounds a note of caution on over-relianceon such technology. Personal auto, he says, is the mostsophisticated line from a pricing perspective — using advancedmodeling and comprehensive data. But auto continues to strugglewith profitability despite that. “The models aren't the end-all,”he says.

“That's a caution flag for other segments too,” he adds,particularly in longer-tail lines. In workers' comp, for example,he says there is growing use of predictive modeling. “But if youget claim trends wrong in a longer-tail line, and there's morevolatility in that line, you can have bigger swings in performancedespite the advanced automation.”