One of the fastest rising inputs in the consumer-price index released this week was the cost of auto repair. Also rising? The cost of auto insurance.
Motor-vehicle repair costs were up 19.7% in May versus a year earlier, according to this week’s CPI update. Inflation in what it costs to cover car-accident claims has been one driver of the sharp decline in underwriting profitability for auto insurers in the past year. A recent report by S&P Global Market Intelligence described 2022 as “historically bad” for U.S. private auto insurers, with the industry recording a 111.8% net combined ratio. Ideally this measure of claim costs and expenses as a percentage of premiums should be below 100. It was more than a percentage point worse than the prior peak in 2000.
And yet shares of insurers with sizable personal-auto businesses haven’t performed nearly as badly as bank stocks recently. In fact, some have seen gains over the past year, including Progressive, Travelers, and Geico owner Berkshire Hathaway.
Investors have been willing to tolerate those rising losses in part because it has also sparked a surge in auto-insurance rates. The cost of motor-vehicle insurance as measured by the CPI was up 17.1% in May versus last year. The cost also jumped 2% on a seasonally adjusted basis from April to May—far faster than the 0.3% month-over-month increase in repair costs.
Premium increases take time to flow through to insurers’ results, partly because they often have to rely on state regulators’ approvals of higher rates. Rising insurance costs are also opening up opportunities for auto insurers to expand their book of business, with more people shopping around for auto policies. A recent study by J.D. Power found that in March the 30-day average rate of consumers shopping around reached 13.1%, well above the 2021 average of 11.4%. The switch rate rose to 4.1%, up from a 3.4% average in 2021.
All of this appears to have opened an opportunity for Progressive, which during 2022 rose to become the second-largest auto insurer in the U.S., according to the J.D. Power study. It also reported a personal-lines combined ratio under 100% last year, potentially giving it the ability to underprice peers and still profitably take share. Progressive increased its personal-auto policies-in-force in the first quarter of 2023 by 11% over the same quarter a year earlier, compared with small increases or even declines experienced by several major peers.
Another possible benefit of this environment is that auto-insurance advertising budgets have widely been cut, making familiar TV faces like Progressive’s Flo or Geico’s Gecko less ubiquitous. That also reduces underwriting expense ratios. With others doing so, cutbacks in ad spending may not have the same impact on growth they have had in the past. “We know that there’s a relationship between advertising and new business apps, but we’re still feeling positive,” Progressive Chief Executive Tricia Griffith told analysts on a call in May.
Progressive shares are up 17% over the past year, keeping pace with the S&P 500—though they have lost momentum in 2023, rising only 1.5%. Yet auto insurers may keep benefiting from still-rising premium rates, more shopping and less advertising even as auto-repair costs begin to ebb or even reverse. It is a reminder that inflation can cut both ways for companies, often ultimately to their benefit.