Wrecked automobile. Material premium rate increases over successive renewal periods and a return to more favorable claims frequency experience are key contributors to fundamental improvement in the U.S. personal auto insurance market. (Photo: Shutterstock)

Steady improvement for U.S. personal auto insurance companies has culminated in the sector’s best underwriting performance in 10 years, according to Fitch Ratings in a new report.

Fundamental improvement

The U.S. personal auto insurance market has shown continued fundamental improvement that is pointing to full-year statutory underwriting profit for the first time since 2007, according to the findings of the report titled, “U.S. Personal Auto Insurance Market: Underwriting Recovery in Full Swing.”

Related: Rising premiums, lower losses bode well for U.S. auto insurance industry

Material premium rate increases over successive renewal periods and a return to more favorable claims frequency experience are key contributors to this result. A 65% industry aggregate statutory direct loss ratio in private passenger auto liability and auto physical damage combined through the first nine months of 2018, represents an improvement of over five points from full-year 2017.

Improved profitability

Favorable statutory results have been supported by improved profitability for nine publicly held U.S. insurers that provide detailed personal auto segment results. This group reported a combined ratio of 92.2% for the first nine months of 2018, versus 98.1% for full-year 2017 and 98.8% for full-year 2016. All nine companies reported better results in 2018.

Strong performance of the group was driven by the three largest insurers in the group:

  • The Allstate Corporation.
  • GEICO Corporation.
  • Progressive Corporation.

Specifically, these insurers benefit most from size and scale advantages that allow for investment in technology to gain pricing and risk selection sophistication, and branding through marketing and advertising.

Geico rebounded from a rare auto insurance underwriting loss in 2017, to a 92% interim 2018 calendar-year result. Interim statutory results from perennial market leader State Farm also indicate strong year over year improvement in automobile underwriting results.

Rate increase fatigue. Flatter price changes expected going forward.

Strong performance aside, the auto market is beginning to show signs of rate increase fatigue following several years of larger price increases. Premium rates continue to rise and motor vehicle insurance costs increased by 6.7% year-over-year as of October 2018, according to Bureau of Labor Statistics data.

Fitch expects flatter price changes going forward given competitive forces and recognition of recent better underwriting performance.

Claims frequency downward trend resumed

Claims frequency experience has resumed its longer-term historical downward trend, driven in part by strong improvements in vehicle safety from technology enhancements, including anti-lock brakes, backup cameras and blind spot sensors. However, technology advances are also a contributor to loss severity increases as vehicles with more sophisticated parts and components are more costly to repair and replace.

Related: New vehicle technologies result in costlier collisions, AAA finds

Bodily injury claims severity remains a prime source of future personal auto profit uncertainty as signs become more evident of medical inflation rising above general inflation and heightened litigation activity and settlement costs in the auto segment.