03/15/2022
The Inflationary Pressures Behind
Double-Digit Auto Insurance Rate
Hikes
By Varada Bhat, Vrushank NayakFebruary 23, 2022
Behind the rate increases being sought by auto insurers lies a costly
jump in prices of used cars, repairs, and rentals.
Used-car prices rose 40.5% for the 12 months ending in January,
according to data released earlier this month by the Labor
Department. That jump helped U.S. inflation hit an annual rate of
7.5%, a four-decade high. Motor vehicle maintenance and repairs
costs were up 4.8% year-on-year, while rental car prices jumped
29.3% in January 2022, compared with the same period last year, the
data added.
“Most auto insurers started talking about inflation in early 2021, but
by the third quarter, used car prices and other auto costs started to
accelerate, which is a big driver of their costs,” William Wilt,
president of Assured Research, told P&C Specialist. “And in the fourth
quarter, auto insurers started to recognize that inflationary pressures
were negatively impacting their margins and started to file mid and
upper single-digit rate increases.”
After gaining from an unprecedented drop in miles driven and
decreased accident frequency when the Covid-19 pandemic kept many
drivers off the roads in 2020 and into 2021, insurers struggled in the
second half of 2021. In the fourth quarter last year, auto insurers
posted bleak results and implemented plans to boost
rates. Allstate raised rates by 7.7% across five locations, the carrier
said in a disclosure last week. Geico got approval for 16 rate
increases in December, according to an S&P report.
Auto Insurers are now impacted at different levels of business. Even as
the miles driven by motorists remained below pre-pandemic levels in
many parts of the U.S., estimated traffic fatalities increased at a
record pace during the first nine months of 2021, according
to data released earlier this month by the National Highway Traffic
Safety Administration. In addition, speeding and distracted driving
have spiked, resulting in more severe and fatal crashes, insurers say.
This means more pay outs for injuries and legal fees, which can drive
up costs of claims.
Additionally, the rising number of car accidents translates into more
demand for replacement cars and repairs. The inadequate supply of
new vehicles due to the global chip shortage has led to a scarcity of
rental cars. Meanwhile, auto-body shops are taking longer to fix cars
because of tight labor conditions, a surging used-car market, and
snarled supply chains for parts. As a result, many insurers that
provide rentals to consumers while their vehicles are under repair
have seen steep increases in rental-car rates and longer rental
periods, contributing to a sharp escalation in claim costs.
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For instance, Allstate’s brand auto property damage frequency was up
21.5% in the fourth quarter of 2021 compared with 2020, but it was
down 13.3% compared with 2019. “But increases in auto severity
reflect inflationary pressure across coverages with a number of
underlying components of severity rising faster than core inflation,”
said Glenn Shapiro, Allstate’s president of property-liability, during
the carrier’s quarterly earnings call on Feb. 3.
The replacement costs for personal auto carriers have increased 12.5%
for January 2022, according to the Insurance Information Institute,
an industry trade group. “Typically, those prices are fairly consistent,
and suddenly, we’re in double-digit replacement costs,” said Michel
Leonard, the institute’s head of economics and analytics. “What that
means for a carrier is that somebody needs to pay for it. This comes
from somewhere, and that’s where we get into these issues of rate
increases.”
The New York-based Travelers has increased rates in 11 states since
August, and the company anticipates additional increases in about 25
states in the first quarter, with more actions planned in subsequent
quarters.
“These profitability challenges are environmental, and we anticipate
that they will persist into 2022,” Michael Klein, head of personal lines
for Travelers, said on the company’s earnings call.
Most industry executives and analysts expect these pressures to
continue into the middle of the year before things improve. “It’ll
probably adversely affect auto insurers’ margins for at least another
quarter,” Wilt said. “But we’re optimistic that if economic conditions
allow that as we get into the middle and certainly latter part of 2022,
the results should begin to improve. History shows that that insurance
companies and actuaries are adept at building an objective
measurable cost increases into their prices.
