Market Expectations 2019 - Auto Will be Hit the Hardest

Risk Channels Insurance Podcast

With an auto policy, it doesn’t matter if it’s a $5 increase or a $500 increase—“if it’s an increase, people are complaining,”.

“It’s just the way the world is nowadays. It’s very rare to run into a clean risk, where the individual or the household doesn’t have something on their record, and it’s hard for a homeowners premium to offset these things so the carrier can still make money.”

In 2018, personal auto carriers non-renew insureds far more frequently than they did in the past.

“They could be looking at it on a small-picture basis, where a risk might qualify underwriting-wise, but the person’s only been a client for two years,”. “They’re thinking, ‘For a $1,200 premium, we’ve already spent $25,000 in claims—it’ll take 20 years to catch us back up.’”

And if the personal auto insurance market is tough, commercial auto paints an even gloomier picture. What’s responsible for rate hikes on both sides? Will the market continue to harden? And how can you solidify your role as a trusted adviser in a line that’s rapidly becoming unrecognizable?

THE 5 CULPRITS

According to James Lynch, chief actuary, vice president of research and education, Insurance Information Institute (III), five main factors are responsible for rising frequency and severity in the auto market:

1) More miles driven. Not surprisingly, the number of accidents is directly related to how much people are driving. “When you go into a recession, a lot of people get laid off, and when people get laid off, they don’t drive,” Lynch says. “A car that’s in the garage isn’t really exposed to accidents as much as a car that’s out on the highway.”

When the economy turned around in 2014, “we started to see more miles being driven countrywide, and that correlates strongly with an increase in claims frequency,” Lynch says.

2) Legalized marijuana. In Colorado, Nevada, Oregon and Washington, where recreational marijuana is legal, collision claims frequency is about 6% higher, according to 2018 research from the Insurance Institute for Highway Safety and the Highway Loss Data Institute.

The studies compared the frequency of collision claims per insured vehicle to the control states of Idaho, Montana, Utah and Wyoming, based on collision loss data from January 2012 through October 2017. Analysts controlled for differences in the rated driver population, insured vehicle fleet, mix of urban versus rural exposure, unemployment, weather and seasonality.

Although recreational marijuana is currently legal in only nine states, medical use is legal in 31 plus Washington, D.C., and more states are expected to follow suit in the years ahead.

Why is that such a big problem for the auto insurance industry in particular? Unlike alcohol, “where the amount of alcohol on your breath is a pretty good proxy for the amount of alcohol in your blood,” Lynch says, there’s not yet a reliable method for testing whether someone is high behind the wheel.

“Legislators and taxpayers need to understand that legalizing marijuana is not free money cascading down from heaven,” Lynch cautions. “It is a public policy choice, and there’s a downside: There will be more accidents, and your insurance rates will be marginally higher, and people will die and be injured because of the legalization of this drug.”

“Those types of choices happen all the time in public policy,” Lynch adds. “We just point out that this involves choices, too.”

3) Distracted driving. Nearly 80% of vehicle crashes involve driver inattention, according to research conducted by the Virginia Tech Transportation Institute.

Although eating and drinking, talking to a fellow passenger, applying makeup, programming a GPS or navigation system, or simply adjusting the radio all qualify as distracted driving, using a cellphone is undoubtedly the biggest concern: According to a study conducted by Cambridge Metrics Telematics last year, phone distraction occurred in 52% of trips that resulted in a crash.

“With the development of smartphone technology, distracted driving is clearly on an increase, although it’s tough to quantify and measure,” Lynch says.

And it’s perhaps an even greater concern in commercial auto than it is in personal, says Art Seifert, president of Glatfelter Program Managers, a division of Glatfelter Insurance Group.

“Because of the rise of internet sales, you have more 18-wheelers on the road than ever before. And because trucking companies are having a very difficult time recruiting new drivers, you also have younger, less experienced drivers behind the wheel,” Seifert points out. “Combine those facts with distracted driving, and you have a very lethal combination.”

4) Higher speeds. Throw in the fact that people are driving faster now than they ever did before, and the situation becomes even more dire. Quite simply, “speed kills,” says Lynch, who notes that speed limits have been increasing for four decades, particularly during the recent recession.

Consider a highway with a speed limit of 70 mph that used to be only 55 mph. “Most people are driving about 75-80 mph, and if you do the math on that, that means you’re driving 40% faster,” Lynch points out. “When you have an accident, the force that’s expended in the accident is proportional to the square of the speed.”

The square of 1.4, or 40%, is basically 2, Lynch explains—which means “the force generated by the accident has doubled,” he says. “Even though we make cars safer today, you can’t get past that problem.”

5) Increasing repair costs. Safer cars themselves are responsible for the final factor. Crowley says claims that used to be $3-4,000 are now $10-12,000. “Minor fender benders are causing significant damage dollar-wise to multiple vehicles,” he observes. “Today’s cars keep you safe in a bubble in the middle, but they’re basically plastic, and they’re just folding up like accordions.”

“There’s a lot of technology to help prevent accidents nowadays, but when they happen, they’re so much more expensive to repair,” agrees Doug Fairbanks, a commercial auto agent at Hartland Insurance Agency, Inc. in Hartland, Michigan. “If someone drives into the front of your car and rips the bumper cover off, 10 years ago that would have been a $500 repair. But if you have an electric vehicle and the charging brain for the car is mounted to the bumper cover, that turns into thousands of dollars.”

Repair costs correlate directly with not only the sophistication of a vehicle’s technology, but also where that technology is located. “If you have sensors, they’re probably along the perimeter of the car,” Fairbanks points out. “That’s what gets hit in small accidents.”

In the event that an accident damages a sensor, repairs will involve not only replacing that sensor, but recalibrating it, Lynch adds—and then, “you have to run diagnostics because of all the computer code within the vehicle,” he explains.

Consider this: Whereas a Boeing 787 has 7 million lines of code and Facebook has 60 million lines of code, a 2016 Ford F150 has 150 million lines of code. “Whenever you have an accident, you have to scan all the electronics before and afterwards, and all those costs keep increasing,” Lynch says.

Then again, the average vehicle on the road in the U.S. was 11.6 years old in 2017, when only about 5% of the fleet incorporated driver assist technologies like automatic braking and lane departure sensing, according to Progressive. But the increasing cost of auto repairs doesn’t depend solely on the kind of tech that will eventually become standard in autonomous vehicles.

“Driverless technology is a good example of the increasing complexity, but it’s not just that. Everything about the way vehicles are built is more expensive—even the sound system or the door,” says Lynch, who notes that an automatic door in a minivan could cost up to $3,000 to repair.

Increasing claims severity is a persistent auto insurance pattern that III has tracked going back 50 years. Whereas accident frequency goes down about half a percent a year on average, “the long-term trend for the cost of a claim is to go up considerably faster than the rate of inflation,” says Lynch, who cites III data showing that between 1963 and 2013, the average size of an auto property damage claim increased a shocking 1,666%.

“It’s enormous, and bodily injury follows similar trends,” Lynch says. “There’s no reason that trend should stop—it’s been going on for 50 years. It’s because autos get safer, we do a better and better job of protecting ourselves, but doing that costs more money.”

PRICING TRENDS

As a result of all of the above, personal auto pricing has been on the rise since 2015, according to Amy Shore, president, Property & Casualty Sales and Distribution for Nationwide.

But data from the National Association of Insurance Commissioners and III suggests that results for personal auto carriers “seem to have turned the tide,” says Lynch, who notes that the combined ratio for personal auto dropped from 106 in 2016 to 103 in 2017.

“For the first two quarters of 2018, it went down another two or three points,” Lynch adds. “That doesn’t necessarily mean the industry is at a point where it’s making a reasonable return on the equity it’s invested, but it is getting better. It’s going in the right direction.”

Shore agrees, predicting that although personal auto rate increases are likely to continue, they will likely be “smaller increases than we have seen in the past few years.”

It’s a different story for commercial auto, where Lynch says combined ratios climbed from 110 in 2016 to 111 in 2017, then “up another point or two” in the first two quarters of 2018: “Double-digit increases in commercial auto books are common.”

“The commercial auto industry hasn’t generated an underwriting profit since 2010,” says Eric Smith, senior vice president, Property & Casualty Commercial Lines for Nationwide. “We should expect rate increases in commercial auto to continue in 2019 and beyond until results improve and rate indications come down.”

And that’s not likely to happen anytime soon. In 2018, Seifert has observed 6-9% rate increases for what he considers good accounts, and 15-20% hikes for others.

“For bad accounts—those that have had real issues—it’s whatever the market will bear,” Seifert says. “I’ve seen rates go up as much as 50% in states. Most insurers are not looking to write commercial auto. They’re going to get their price, or they’re going to walk away.”

Fairbanks points out that “it doesn’t even have to be a bad risk.” One of his contractor clients—who “had good credit, didn’t have claims, no driving history problems,” he says—recently leased two new Dodge pickups. “It was $5,000 a year for those two trucks, and that was our best option. The rates were even higher with other companies. That’s something I can’t explain.”

Although pricing for fleets is a bit kinder—Fairbanks cites a gravel train that was able to secure $1 million in liability, plus comp and collision, for just $600 a year—commercial auto pricing overall is “frustrating for the clients,” he says. In the contractor’s case, “that’s basically another used vehicle that he probably had not budgeted for at the time of his purchase.”

In addition to contractors, Fairbanks says the market is hardest for “intensified retail delivery” clients—“especially the hired and non-owned auto portion of pizza delivery shops,” he says.

But long-haul trucking is by far the “toughest” commercial auto sector, according to Richard Kerr, MarketScout CEO. Insurers in the space have “just been killed on loss experience,” he says. “It’s pretty simple—if you pay out 140 in claims and you collect 100 in premium, that’s not good. Most carriers have been really suffering from that. Everyone’s struggling with how to get it right.”

RISK MANAGEMENT

For many commercial auto carriers, that means focusing on driver training programs and technology-based risk management solutions that track driver behavior and reduce liability exposures.

Earlier this year, Munich Reinsurance America teamed up with eDriving, a provider of online driver training and global driver risk management, to offer companies with commercial fleets access to eDriving’s smartphone-based telematics program Mentor®. The program combines a client’s collision, motor vehicle report and telematics data with behavioral science and advanced micro-training to help identify and remediate risky drivers and behaviors.

Similarly, Heather Day, general manager, Agency Distribution at Progressive, notes that the company recently launched Smart Haul—a usage-based insurance program for commercial truck drivers, which offers those who qualify a minimum savings of 3% on their initial commercial auto period simply for signing up and sharing their driving data.

And Nationwide has plans to incorporate a similar program in order to offer premium savings alongside “valuable fleet management services and insights,” Smith says.

While Fairbanks says his agency has always focused heavily on hiring and checking MVRs for commercial auto clients, recent developments in telematics “can give live reports to owners about how their drivers are operating,” he says. “Things like that give the underwriter a lot more comfort in adding credit or other incentives to be able to bring the rates down from where we’re starting.”

Regardless of what kind of training program commercial auto insureds have in place, “underwriters are looking for those, and they’re looking for real driver selection criteria,” Seifert says—which means as an agent, it’s important to tell clients, “you better start getting some risk control religion if you want to be able to control your cost of risk transfer over time.”

The concept of tying rates to actual driving habits “resonates strongly with customers” on the personal lines side as well, observes Shore, who notes that UBI programs “give customers more control over their rate level.”

“Whether you’re comfortable with it or not, UBI is probably going to end up in the car anyway,” predicts Jean-Marie Lovett, president of MassDrive, a Boston-based independent insurance agency, and Bindable, a technology firm that supports insurance companies and their consumers. “Direct writers are pushing price, price, price. Understanding UBI is going to be very important for agents, because being able to point out the nuances between one policy and another is what gives them value.”

REFERENCES

https://www.iamagazine.com/magazine/read/2018/12/03/auto-zone-state-of-the-market

https://www.willistowerswatson.com/en-US/insights/2018/11/insurance-marketplace-realities-overview