US Personal Auto Insurance Results Worsen as Claims Severity Rises
While 2022 was considered the “perfect storm”, 2023 mid-year results look even worse
From bad to worse. That seems to be the key message from AM Best’s recent study on the U.S. Personal Auto Insurance Results in 2023. The report, entitled “US Personal Auto Results Worsen as Claims Severity Rises” notes that while the rating agency described 2022, as “the Perfect Storm”, results of the first half of 2023 are indicating that U.S. personal auto insurer results, in 2023 is shaping up to be even worse.
“AM Best-rated carriers have said that they are reassessing their personal auto portfolios and implementing steps to address selection and price adequacy concern, but the time-consuming regulatory process for rate increases, which varies by jurisdiction, has made it difficult for insurers to stay ahead of deteriorating severity trends and address rate needs in real time,” said David Blades, associate director, Industry Research and Analytics, AM Best.
Direct incurred loss ratio for first half of 2023 already three points above prior year
The deteriorating direct loss ratio through the first half of 2023 occurred despite a 12.9% year-over-year increase in direct premiums written as carriers took steps to address prevailing loss frequency and severity trends. With the higher premium levels, carriers can see some benefit from a lower underwriting expense ratio noted AM Best in its report.
In an interview discussing these results, Mr. Blades was asked if conditions had let up at all since 2022. While he said that “I would love to give a positive answer to that”, right now with the numbers he has seen through mid-year, he has not seen an improvement for the overall private passenger auto industry.
In particular, he noted that loss ratios are not improving at all. “If you look at the particular segments or coverage parts for private passenger automotive on the liability side and the physical damage side, we’ve seen the direct loss ratio go up by three or four points through mid-year for both of those ratios.” he explained. “So, when you talk about last year being the perfect storm,” he continued, “The fact is through mid-year we are seeing loss ratios that are actually higher.” As such, he cautioned that this is something “…to be concerned with in terms of what we will probably see at the end of the year.”
And while companies have pushed for greater rate adequacy, he advised that the number one thing that carriers can do is to “drill down” and look into their individual portfolios to pinpoint the issues that are facing, whether it is jurisdictional or underwriting problems, and then effectively address those issues.
Ultimately, those carriers that are able to best pinpoint pressure points, mainly by utilizing technology-driven data analytics to help with their claim handling, risk selection, and underwriting will find the measures they can implement in order to “attack the issues they might in their portfolios” and will allow them “to help curtail the negative trends in their books” and really start to see things “turnaround in a more positive direction”.
“We may see that over time, or at least in the near future, but as of mid-year we have not seen a great turnaround in terms of the results.”
Have market conditions eased at all in 2023?
The AM Best report noted that personal auto loss severity led to significant 13-percentage-point jump in the net loss and loss adjustment expense (LAE) ratio for the private passenger auto line in 2022. The average cost per private passenger auto claim increased 16% in 2022 and eclipsed the $10,000 per claim threshold.
Expounding on the above data, Christopher Graham, senior industry analyst, Industry Research and Analytics, AM Best, noted during the interview that while economic inflation has eased, it does not account for social inflation. “Social inflation has been a big driver in loss increases in commercial auto, and not it looks like it is creeping into personal auto,” he surmised. So, while there are less accidents now, than even pre-pandemic, they are more severe.
“Fatal accidents are way up,” and that is what is pushing for more social inflation, which is not going to go away, even if it eases up, he explained. “The level of loss that we are at per claim is here to stay, it is not going back. That is what is driving all this, the increase in severity is outrunning the decrease in claims.”
Overall, it is a complicated process, concluded Mr. Graham, noting that it will be interesting to see where these numbers will be in 2023, based on how carriers reacted to the results from 2022. “The macroeconomic conditions that we are seeing here are not going away any time soon,” cautioned Mr. Graham. “It is not going to be easy, and you will still have some increase in the loss cost no matter what, short of a big change in frequency, which is on the drivers, more than it is anybody else.”
