Pandemic Impact on Personal and Commercial Auto Insurance: Deloitte

With people generally driving a lot less due to the pandemic, personal and commercial auto insurance carriers should expect to see a steady decline in premiums written for the next several quarters, and perhaps even for years. But given the lower traffic density, profitability could get a boost since fewer accidents would likely result in fewer claims.

Source: Deloitte | Published on August 14, 2020

auto insurance premiums fanning inflation

Coronavirus-related shutdowns and restrictions, along with the resulting slowdown in economic activity, led to a year-over-year drop of 40.2% in miles driven by US drivers in April 2020 and 25.5% in May 2020, according to the latest available data from the Federal Highway Administration. The Freight Transportation Services Index, an indicator of commercial auto activity, was also down year-over-year by 13.7% in April and 11.9% in May.

Although reports suggest that driving trends have started to normalize in recent months, persistent health concerns, a greater acceptance of remote working, and an ongoing economic slowdown could result in reduced vehicle usage for quite some time.

Our baseline forecasting scenario suggests that a combination of factors prompted by the pandemic could result in a decline of 6.2% in personal auto insurance premiums written, and 3.5% for commercial auto in 2020.

For personal auto, the premium drop could come in the form of refunds or dividends to policyholders, as well as premium discounts upon renewal. Most personal auto carriers returned between 10% and 25% in premiums to customers during March, April, and May to account for the vastly lower number of miles being driven. However, these credits are likely short-term in nature and may only impact premiums in quarters two and three of 2020. Premium volume may be restored once carriers complete their COVID-related returns and driving starts to return to normal levels.

If, on the other hand, insurers offer premium discounts going forward on new and renewal policies due to more systemic changes in driving patterns, that could have a longer-term impact on personal auto premium volume. Indeed, our actuarial team anticipates single-digit rate decreases for the next several quarters, which would keep personal auto premiums well below prepandemic levels until 2023.

For commercial auto, meanwhile, premium credits were not nearly as ubiquitous as in personal auto due to the disparate risks of different client businesses. Yet an overall decline in commerce due to a pandemic-triggered slowdown in the economy will likely keep premiums below prepandemic levels at least until 2022.

Working with our actuarial team, we created a model to forecast net written premiums for auto insurance for 2020, 2021, and 2022 under three different scenarios envisioned by Deloitte’s economics team: Baseline, no end in sight, and fast bounce back.

The bottom line: Forecast findings

In our baseline scenario, personal auto net written premiums may have dropped by as much as 11.4% quarter on quarter (QoQ) in Q2 2020, mainly driven by premium returns to policyholders. Premiums could stage a comeback with a quarterly rise of 11.2% in Q4 2020 if carriers end premium refunds. That said, due to decreases in rates, premiums are expected to decline 1.3% QoQ from Q1 2021 to Q1 2022.

There is a much smaller drop and less volatility anticipated for commercial auto. In the baseline scenario, net written premiums could slide 1.4% QoQ for all of 2020 due to the economic slowdown, while remaining flat in 2021. Commercial auto could return to growth, but with a quarterly rise of only about 1.0% in 2022.

Our no end in sight and fast bounce back scenarios result in varying levels of premium returns and rate declines. The duration and level of premium returns are expected to be key factors in determining when personal auto premiums might make a comeback.

There is a silver lining, however, for auto insurers: Fewer miles are being driven. Reduction in traffic density normally lowers claim frequency, since roads are safer with fewer vehicles. Ultimately, this should help improve the industry’s bottom line.

In fact, S&P Global expects the personal auto combined ratio (representing the combined insured loss and expense ratio versus a premium dollar written, indicating an overall underwriting profit or loss) to fall to a profitable 93.1% in 2020—an 8.9 percentage point reduction compared to the 102% average for 2015–2019. Meanwhile, the combined ratio for commercial auto insurers could improve by 6.3 percentage points, from an average of 109.5% for 2015–2019 to 103.2% in 2020. This will likely be a welcome relief for auto insurers—especially for commercial carriers, which entered 2020 having nine straight years of above-100 combined ratios.

Calls to action for auto insurers

Here are some potential actions auto insurance carriers could take to help mitigate risk, protect their brands, and respond to market shifts as a result of the pandemic:

Leverage data analytics. Insurers without usage-based technology will likely have to develop alternative methods of managing their exposure, as past driving and accident patterns can no longer be relied upon to project future exposure. They should seek external data sources for new expectations around miles driven, traffic congestion, and the like to improve risk selection, underwriting, and pricing capabilities.

Focus on structural cost transformation. After addressing immediate opportunities to relieve bottom-line pressure in line with COVID-19 strategies, insurers can lay the foundation for future recovery and sustained operational excellence through structural cost transformation in distribution, underwriting, and claims.

Manage reputational risk. Carriers should also focus on managing potential reputational risks by continuing to demonstrate social responsibility and empathy for clients, claimants, and society at large. This may include using analytics to better anticipate client needs, providing positive experiences in managing claims, and remaining flexible with coverages and payment plans.