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Analysts agree rate spikes auto insurers’ only choice

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A recent report from Actuarial Review cites data analysts and Carfax as stating that auto insurers don’t have much of a choice in raising rates because of inflation, COVID-19 pandemic effects, and state regulations.

Total loss thresholds are decided at the state level and vary across the U.S. For example, it’s as low as 50% in Iowa and as high as 100% in Colorado and Texas. Most states that mandate total loss thresholds are at 75%.

Carfax National Sales Director Dan Hill told Actuarial Review that it’s generally 65% of actual cash value (ACV), adding that the formula is outdated, which causes collision claims to more often become total losses.

“Many insurers are stuck with vehicle damage that exceeds the total vehicle loss threshold, so they are sold as salvage vehicles and either crushed, salvaged for parts, or sold at auctions,” Hill said in the article.

He added that vehicles sold at auction and then repaired “have a significantly higher loss experience in future accidents.”

“The only recourse is raising rates and tightening underwriting,” according to Roosevelt C. Mosley, Casualty Actuarial Society (CAS) president and Pinnacle Actuarial Resources principal. “We are going to be in this continuous cycle until inflation is under control or affordability issues become so acute that other, more significant actions must be taken.”

AM Best reports that the combined ratio of personal auto insurance increased 10.7% from 101.4 in 2021 to 112.2 in 2022. Verisk found loss ratio reached 97% during Q1 2023 compared to 85% in Q1 2022.

Based on J.D. Power research findings released in October, P&C independent insurance agents are increasingly frustrated with rising carrier premiums and, instead of telling their clients first, they’re shopping for better rates ahead of policy renewals.

According to Verisk, the number of paid claims in 2022 reached the pre-pandemic level recorded at the end of 2019, which was more than 20 million. CCC Intelligent Solutions said in August the cumulative annual cycle time across 26 million automotive claims last year added up to 2 billion days, up 1 billion over 2021.

Paid claims were hovering around 19.5 million in Q1 2023, according to Verisk.

According to Actuarial Review, contributors to claim severity and increasing rates include medical and social inflation, climate catastrophes, and state regulations but noted that experts agree the two primary reasons are the repair and replacement of vehicles.

“I have never seen physical damage results this bad absent a catastrophe,” Mosley said of physical damage claim severity. “It’s not even close.”

Claim severity trends driving rising loss ratios show that bodily injury liability severity rose 44% from $16,831 per claim during the rolling four quarters ending 1st quarter 2018 to $24,234 in the 1st quarter 2023, according to Verisk’s data as collected by Actuarial Review. Property Damage Liability rose during the same period by 60% from $3,723 to $5,945.

According to U.S. Bureau of Labor Statistics data reported by Actuarial Review, repair costs increased by 39.9% from June 2019 to June 2023 and from June 2022 to June 2023, by nearly 19.8%.

CCC said in September that the growing electric vehicle (EV) and advanced driver assistance system (ADAS) markets are forcing repair facilities to spend more time and money properly repairing vehicles.

CCC’s data showed the total cost of labor for vehicles manufactured in 2021 with autonomous braking was up to 19% higher than repairs to vehicles made in 2015 that lacked such technologies.

During Q1 2023, nearly 60% of repairable appraisals included a scan procedure, up nearly 8% year-over-year, according to CCC.

During the same time period, more than 70% of current-year or newer vehicles included a scan and 13.6% of appraisals included fees for calibration operations — a 5% year-over-year increase. More than a fourth of vehicles one to three years old included a calibration, according to CCC.

Mitchell International’s latest “Plugged-In: EV Collision Insights” report found that between Q1 and Q3 of this year, the EV total loss rate was 7.25% for model years 2020 and newer. Among luxury internal combustion engine (ICE) vehicles made around the same time with a comparable ACV, the total loss rate was 7.47%, Mitchell said.

Mitchell Claims Performance Director Ryan Mandell told Repairer Driven News at the time, “I’m not sure where these misconceptions about EVs totaling at a greater rate than ICE vehicles are coming from but our data certainly doesn’t support that.”

A Nov. 21 report from Swiss Re Institute states real premium growth globally in the P&C segment will reach an estimated 3.4% then 2.6% between 2024 and 2025.

“This reflects a significant repricing of risk, especially in claims-impacted lines,” Swiss Re wrote.

Swiss Re also predicts “easy” disinflation is over in the U.S. and Europe and expects “gradual, bumpy moderation” in Consumer Price Index (CPI) inflation.

Actuarial Review predicts that, “Unless the upward trends for physical damage and frequency reverse, insurers may face resistance to rate increases and will need to adjust approaches that made sense in the past.”


Featured image credit: Juststock/iStock

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