Inflation Pressures, Mounting Accidents, Flooding From Ian Hit Allstate, Other Insurers

The nation's largest auto insurers, already struggling with high inflation and mounting accidents, are now facing losses from vehicles flooded by Hurricane Ian.

Source: WSJ | Published on October 21, 2022

Auto accidents

Allstate Corp. announced Wednesday that it would take a $875 million charge to boost its claims reserves in its upcoming third-quarter earnings, primarily related to its auto-insurance business, as a result of inflationary pressures. In the second quarter, Allstate, a top-five auto and home insurer by premium volume, took a $408 million inflation-related charge.

"Things keep getting worse for the personal auto sector," wrote Elyse Greenspan, a Wells Fargo Securities analyst, in a client note. The increase in Allstate's reserves "highlights how bad the auto business is right now."

Allstate will report a third-quarter year-over-year loss of $675 million to $725 million as a result of the charge. In early afternoon trading Thursday, Allstate's stock was down 11%. Progressive Corp. and Travelers Cos., both of which reported weaker third-quarter auto-insurance results, as well as other publicly traded insurers, were down slightly. Many of the major auto insurance companies are not publicly traded.

Inflation has surpassed Ian as the focus of Allstate's attention for the quarter. Allstate estimated that catastrophe events would cost it $763 million pretax, net of reinsurance. Hurricane Ian, which hit southwest Florida in late September, accounts for $366 million of the total. (In addition, Allstate said it would use $305 million in reinsurance to pay Ian's claims.)

Many of the Ian-related claims are expected to be for vehicles damaged by the storm surge and widespread inland flooding caused by Ian.

According to Allstate's preannouncement, costs "continued to rise in both bodily injury and physical damage coverages." It cited higher medical treatment costs, more severe accidents, and increased legal action as reasons for increasing reserves.

Allstate and Travelers announced additional premium rate increases in response. Travelers implemented rate increases averaging 8.5% in 26 states during the third quarter, based on state regulatory approval processes. When policies are up for renewal, such increases are billed. The company is also taking "non-rate actions." These include tightening underwriting criteria and limiting new sales in certain states.

In September, Allstate reported that policies issued under the Allstate brand saw 16.2% rate increases in eight locations. "In response to inflationary increases in loss costs, Allstate continued to implement significant auto insurance rate actions in the second half of 2022," the company said in a preannouncement.

On the one hand, large car insurers that also sell home insurance, such as Allstate, benefited from Florida's low market share. For decades, this has been a deliberate strategy to limit exposure in the hurricane-prone state. Instead, dozens of small to midsize carriers and a state-run insurer of last resort will bear the majority of the cost of rebuilding homes.

All of these carriers, as well as the majority of national carriers, use reinsurance to defer some of the cost of catastrophe claims.