Segment results disclosed in GAAP filings by a group of 10 publicly traded insurers representing approximately 42% market share reveal a highly profitable segment combined ratio averaging 88% for 2020, representing an 8 percentage point improvement from 2019. The Travelers Companies, Inc. (TRV) and The Hartford Financial Services Group, Inc. (HIG) led the pack with auto combined ratios below 86% for the year. Lower relative performance improvement for Kemper Corporation was driven by prior-year adverse reserve development. Earned premiums for this group expanded by a modest 2% in 2020 versus a 9% 2019 increase.
This shift in performance is tied to reductions in driving activity from the economic downturn and efforts to combat the pandemic that led to a sharp decline in auto claims frequency. Auto claims statistics reported by three of the largest U.S. personal auto writers, The Allstate Corporation, GEICO and The Progressive Corporation, show that frequency fell by approximately 27%-30% in 2020 for physical damage claims and 25%-30% for bodily injury compared to a 0%-4% decline in frequency for these coverages in 2019.
Declines in frequency were offset somewhat by more rapid growth in claims severity of 8%-10% for physical damage and 12%-13% for bodily injury. Underwriters point to accidents occurring at higher speeds in less crowded traffic conditions and distracted driving as contributors to these severity trends. The National Safety Council reports an 8% increase in automobile crash fatalities in 2020, despite a 13% reduction in miles driven.
Underwriters responded to changes in risk exposures through a variety of premium return and rebate programs that are substantial but did not fully offset loss cost benefits derived from lower frequency. Individual company accounting treatment of these programs vary and affect segment results differently. GEICO’s auto written premiums fell by approximately 3% in 2020, largely related to its premium giveback program, whereas PGR and ALL each reported an approximate 3.7 percentage point increase in the auto expense ratio for 2020 tied largely to these actions.
Effects of additional rebate and return programs and a downward trend in premium rates are anticipated to influence results in 2021. CPI data on motor vehicle insurance costs indicate an unprecedented reduction during 2020, including a 13.8% decline in spending on insurance in May. Costs have continued to decline in 2021, with a 3.7% drop in January.
Further pricing pressure is likely in response to recent operating success and as companies strive to retain policyholders, which will contribute to a reversion to pre-pandemic performance levels in 2021. Beyond 2021, a combination of more rampant price reductions as claims frequency moves to historical norms and loss severity trends that fail to subside could lead to sharply weaker underwriting results. This was seen as recently as 2016, when the industry statutory combined ratio reached 106% as recently as 2016.
The U.S. property and casualty (P/C) insurance market continues to be affected by the ongoing economic fallout and change to consumer social behavior resulting from the pandemic. Outside of personal auto results, commercial insurers are incurring substantial pandemic-related losses and pressure in product lines such as business interruption, professional liability and workers compensation. However, Fitch’s fundamental sector outlook for U.S. P/C insurers is expected to improve in 2021, with accelerating premium rate changes and tighter policy terms in commercial lines supporting improvement in underwriting profits.