Auto Insurance Companies’ Rising Rates Are No Accident

Auto insurers are scrambling to keep up with rising claim costs.

Source: WSJ | Published on January 25, 2023

Auto insurance costs

Auto insurers are scrambling to keep up with rising claim costs. Investors should brace themselves.

Auto insurance loss trends remain bleak, fueled by rising costs to cover accidents. Travelers reported an underlying combined ratio of 110.5% in its personal auto business for the fourth quarter, which means payouts and expenses exceeded premiums earned, excluding catastrophe-related losses and adjustments in reserves for previous years. That was a nearly 7 percentage point increase from the previous year.

Travelers, like other auto insurers, has been pushing for premium increases in order to cover rising loss ratios. This is a time-consuming process that includes obtaining approval from state authorities as well as waiting for policies to be renewed.

According to Travelers, rising losses were only “partially offset” by the growing benefit of earned pricing. It stated that the impact of earned pricing will continue to grow through 2023, and that it still expects “auto pricing to be adequate in states representing the majority of our business” by the middle of this year. Travelers’ shares were up about 3% in afternoon trading on Tuesday, owing to the stock’s positive outlook.

Of course, this assumes that trends in accident frequency and severity, as well as rising costs for both repairs and bodily injuries, do not significantly accelerate from here, extending the time it takes for pricing to catch up to losses.

Inflation data illustrates the uphill battle that insurers face: The consumer-price index for average motor vehicle insurance costs increased 14.2% year on year in December.

This increased faster than vehicle maintenance and repair costs, which increased by 13%. December marked the third consecutive month in which insurance premiums grew faster than repair costs, but the gap was narrowing. The figures for January will be closely scrutinized.

Then there’s the question of how all of these rate hikes will affect customer growth. Though the industry is pushing for higher rates, it is possible that some carriers will push slightly less hard, or offer some other type of concession or benefit, in order to gain market share.

Travelers reported a 11.4% increase in personal auto renewal premiums in the fourth quarter. That was significantly higher than the 2.1% increase in the previous quarter and faster than the 8.2% increase in the third quarter. On the other hand, its personal auto retention rate fell to 82%, 4 percentage points lower than a year ago. Year on year, new business written premiums fell 3%. Policies in force decreased sequentially, from 3.053 million in the third quarter to 3.051 million in the fourth quarter.

Given the challenges that auto insurers face, investors should look for that kind of discipline—potentially letting a customer go if they aren’t keeping up with loss trends.

Furthermore, an insurer’s risk capacity may be better put to use in other areas right now. In the business insurance industry, for example, a long trend of rate increases has contributed to higher underwriting margins. Rising reinsurance rates and falling capacity may also create opportunities for companies scrambling to find adequate coverage to write business.

Following a year in which they outperformed other financials, most property-casualty insurers’ shares have started the year relatively weaker. Travelers is up about 2% year to date, while the S&P 500 financials are up nearly 5%. However, with a potential inflection point for rates and loss trends yet to come, investors who have been along for the ride thus far may not want to pull over just yet.