Commercial Auto Insurers Face Inflation and Loss Severity, Impacting Positive Growth

According to a new AM Best report, a return to pre-pandemic norms in the nonstandard auto insurance segment in the United States, with higher loss-cost pressures, elevated inflation, and supply chain issues, may counteract recent positive market trends.

Source: AM Best | Published on November 15, 2021

Vehicles with their brake lights lit up as they are stopped on an inboud interstate highway on an overcast summer morning in chicago.

According to Best's Market Segment Report, "Inflation and Loss Severity Counteract Tailwind from Pandemic Recovery for Nonstandard Auto Insurers," direct premiums written increased by 11% in the first quarter of 2021 and 13% in the second, compared to the same periods in 2020, representing the highest quarterly percentage gains since the beginning of 2018. AM Best, which has a stable market segment outlook on the private passenger nonstandard auto (PPNSA) segment, forecasts a direct premium of $17.8 billion for 2021, a 7.2 percent increase year on year. The segment's combined ratio for 2020 was 99.6 percent, a 1.4-percentage-point improvement from 2019, owing in large part to lower loss frequency due to the COVID-19 pandemic.

The report does note, however, that whether the premium momentum of the first half of 2021 will continue through the rest of the year is uncertain. Although an economic recovery and lower unemployment should continue to drive premium growth, worsening results through the first half of 2021 due to loss cost pressures suggest that recent positive trends have ended.

Furthermore, higher fraudulent claims costs, which remain a major issue for carriers due primarily to the inherent complexities of insuring higher risk, have weakened underwriting profitability in the PPNSA composite, according to the report. Nonstandard automakers may need to step up their efforts to find the right combination of technology and infrastructure to aid in the detection of fraud attempts. Companies that lack these capabilities may be more vulnerable and potentially at a competitive disadvantage.

Furthermore, efficient technology platforms with extensive, highly credible data sets and multivariate rating analyses have assisted some of the nation's largest private passenger auto insurers in expanding their presence in the nonstandard market. As a result of the resulting competitive pressure on smaller writers in the PPNSA composite, some have left the market. With the nonstandard market experiencing accelerated growth, merger and acquisition activity is likely to increase.