APCIA Publishes Paper on Auto Insurers’ Challenges with Inflation

A new paper from APCIA shows inflation having a significant impact on auto insurance loss ratios, which have risen to their second-highest level in more than 20 years, reaching 78.4 percent in the second quarter of 2022. In the meantime, driving behaviors continue to deteriorate.

Source: APCIA | Published on October 26, 2022

Auto insurers premiums rise

The latest paper from the American Property Casualty Insurance Association, “The New Normal? Auto Insurers Continue to Struggle with Inflation,” demonstrates how auto insurance claims inflation continues to outpace underlying consumer price index inflation at a much faster rate than premium increases.  Some key points in the paper include:

  • Increasing litigation and medical expenses continue to have an impact on auto insurance losses
  • Increasing the severity of injury claims compensates for the decrease in frequency.
  • Auto repair, car rental, and vehicle replacement costs continue to rise.
  • The increasing frequency of vehicle damage claims multiplies the inflation of repair costs.

According to APCIA’s research, inflation is having a significant impact on loss ratios, which have risen to their second highest level in more than 20 years, reaching 78.4 percent in the second quarter of 2022. In the meantime, driving behaviors continue to deteriorate.

“The increase in loss ratios has surprised some,” said Robert Passmore, APCIA’s department vice president of Personal Lines. “In the early stages of the pandemic, auto loss costs briefly fell due to a significant decrease in miles driven, resulting in fewer accidents and claims to be paid.” However, as stay-at-home orders were lifted and restrictions were relaxed, miles driven quickly returned to pre-pandemic levels. Now, data from the United States Department of Transportation show that vehicle miles traveled (VMT) from 2022 (January-May) are within 1% of the pre-pandemic VMT level for the same five months in 2019.”

Insurance claim costs have continued to rise faster than the underlying consumer price index, far outpacing premium increases, despite the highest inflation in 40 years. Furthermore, the National Highway Traffic Safety Administration (NHTSA) predicts that 42,915 people will die in motor vehicle traffic crashes in 2021, a 10% increase from the 38,824 fatalities in 2020. “This is the most fatalities since 2005, as well as the highest annual percentage increase in the Fatality Analysis Reporting System’s history,” Passmore said.

According to the APCIA paper, increasing claim frequency multiplies the impact of inflation on auto insurance claims costs. “The now increasing frequency of claims, combined with significantly higher auto repair and replacement costs, has had a significant impact on auto insurance costs for auto insurers.” As of the first quarter of 2022, claim severity for vehicle damage, which includes property damage liability and collision coverages, had increased nearly 41 percent since 2017.”

While many would expect auto loss costs to return to more traditional levels as driving levels returned to more traditional levels, other trends have emerged, pushing costs higher, prompting some to wonder if this is the new normal for auto lines of insurance.

“The jury is still out on whether this is the new normal for auto insurance,” Passmore said. “However, most indicators suggest that elevated auto repair and replacement costs will last well into 2023 and possibly beyond.” “Medical inflation is also increasing, and while insurers continue to closely monitor the situation, claim frequency and severity are increasing, impacting injury and vehicle costs.” As a result, insurers may find themselves forced to pass on these costs to policyholders.”

“Insurers are strongly encouraging drivers to minimize their risk by avoiding risky driving behaviors that may result in a loss,” to address these trends. Insurers are also advocating for improved infrastructure, such as more reliable supply chains for critical auto parts and safer roads, which should result in fewer accidents and lower claims costs, allowing insurance premiums to remain affordable for consumers.”