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AUTO INSURERS RAISE RATES TO KEEP PACE WITH INCREASE IN SEVERITY
Automobile insurers are responding to a prolonged rise in the bodily injury portion of claims by increasing prices to keep pace with loss costs, with several publicly traded insurance companies noting the trend.
“We have seen over the past few years moderately rising claims severity for bodily injury claims, which has mainly been attributed to medical cost inflation,” said Charles Huber, an A.M. Best Co. managing senior financial analyst in the property/casualty ratings division. “A weak economy may also be contributing to higher
liability claims because there is potential for more fraud,” Huber said.
Insurers overall have recognized the trend and have responded
by increasing rates, which have kept earnings stable in the
private passenger auto liability line in recent years, Huber said.
The cost per claim may have two components: bodily injury,
which is the liability portion and includes items like medical bills;
and physical damage, which includes the cost of auto repairs.
“When we look at the results, although claims severity has
been trending upward, we see loss ratios on the auto liability
line being fairly stable,” Huber said. “As a matter of fact, the
loss ratio through nine months is about a point better for 2012
than it was in 2011.”
“The industry has also seen rising auto repair costs in recent years, which would impact the physical damage portion of the auto
cover,” Huber said. Physical damage claims have also gone up due to severe weather and damage from hail and flooding.
“We may see an increase in the physical damage loss ratios in
the fourth quarter of 2012 because of Hurricane Sandy losses,”
Huber said. Through the first nine months of the year … the
auto physical damage loss ratio has been down for the industry.
“That’s pre-Sandy numbers, so just how much impact Sandy
might have on industry numbers for the year we won’t know
until we compile annual statements.”
The insurance industry in 2011 wrote direct private passenger
auto liability premiums of $102 billion, which is a 6.7% increase
from the 2007 figure, according to BestLink, A.M. Best Co.’s online
financial system. The industry in 2011 wrote direct private
passenger auto physical damage premiums of $64.6 billion, a
2.6% decrease from the 2007 figure.
Mercury General saw its bodily injury severity increase in 2012,
Gabriel Tirador, the company’s president and chief executive
officer, said in a recent conference call. The company raised auto
rates in its home state of California by 4% in the fourth quarter,
but he doesn’t think that will be enough to reach the company’s
profitability target this year.
“We believe the increase in severity we are seeing is in part due
to more severe accidents,” Tirador said. “Overall, we have
experienced an increase in medical bills and medical procedures
such as epidural injections.”
Brian MacLean, president and chief operating officer of Travelers
Cos., said during a recent earnings call that severity, particularly
the bodily injury component, has been trending upward for the company. MacLean said the rise has several parts, including
expected general inflation and simply more severe accidents. He said the physical damage portion of severity was elevated in the first half of 2012, but returned in the second half of the year to near-normal levels.
Nationwide has seen severity pick up in the past few years,
leaving the company reacting from an underwriting and pricing
standpoint, Nationwide Chief Financial Officer Mark Thresher
told Best’s News Service.
“We can speculate on a lot of things,” Thresher said. “People
talk about older cars and a variety of things, but we’re taking a
look at where it has happened and why and making sure we
understand it from an underwriting standpoint.”
Travelers data on the industry show severity has been creeping
upward in the past decade, showing average losses per claim
for the industry in 2002 were about $2,500, whereas the figure
was about $3,000 by the third quarter of 2012. As severity has
risen, frequency had been trending downward until a few years
ago when it bottomed out. MacLean attributed the frequency
reduction to societal changes in vehicle safety and young drivers,
which had been offsetting the severity trends.
“So, auto has been … a place where, quite frankly, we are
disappointed with the returns that we’re generating,” MacLean
said during a recent presentation. “And we need to do better.
And in the near-term, pricing needs to be a significant component
MacLean said the company is responding to the severity uptick
with rate increases, with renewal premium change at 9% in the
fourth quarter. The company’s auto retention is at 81%, but new
business levels have been impacted by rate increases. It’s not
just private passenger auto MacLean said commercial auto has
also been severity driven recently from the bodily-injury side.
State Auto Financial Corp. is also dealing with elevated levels
of bodily injury severity in personal auto, as well as commercial
auto, said President, Chairman and Chief Executive Officer Bob
Restrepo. The company in 2012 increased personal auto prices
4.3%, but that did not exceed loss cost trends, he said.
The top five writers of private passenger auto in 2011 were
State Farm Group, with market share of 18.07%; Allstate
Insurance Group, with 10.48%; Berkshire Hathaway Insurance
Group, with 9.22%; Progressive Insurance Group, with 8.06%;
and Farmers Insurance Group, with 5.99%, according to BestLink.
Author: Michael Buck—Senior Associate Editor, A.M. Best Magazine, Inc.