The Federal Insurance Office recently released an analysis of the auto insurance industry including a look at rising premium costs, state regulatory behavior and newly introduced technology, such as AI.

The Report on Personal Auto Insurance Markets and Technological Change notes that most Americans rely on private autos for transportation with 68.7% of Americans in 2022 driving to work alone.

All states but New Hampshire also require vehicle owners to maintain personal liability auto insurance, the report says. However, 14% of drivers did not maintain the legally required insurance coverage in 2022.

“Reasons that people may drive without insurance vary, but there is evidence that cost is a
factor,” the report says. “Consumers with limited means may forego auto insurance to prioritize paying for basic necessities such as food and shelter. Consumer concerns about increased insurance costs appear to have escalated in recent years, which may correlate with an increased number of uninsured drivers.”

Between 2015 and 2022 premiums for minimum required state-mandated personal auto insurance, or financial responsibility limits (FR), increased, while loss frequency decreased, the report says.

FR limits policies are about 18% of the overall personal auto market, the report says. It says the average annual premium for policies at FR limits policies increased from $416 to $550 between 2015 and 2022. The average loss severity for FR limits policies increased from $5,127 in 2016 to $6,182 in 2022.

The report says the loss frequency FR limits policies declined from 6.07 accidents per 100 exposures in 2016 to 4.57 accidents per 100 exposures in 2022.

Personal auto insurance premiums were approximately $318 billion in 2023, about 35.8% of the entire U.S. property and casualty insurance market.

Insurers have spent a relatively smaller share on operating and overhead costs between 2000 and 2022, the report says. The loss adjustment expense (LAE) ratio, which measures administrative costs related to investigating, managing and settling claims, has trended down over this period, falling from 13 in 2000 to 10 in 2020 through 2022, the report says.

“These observations demonstrate that losses (rather than expenses) have been the primary
determinant of overall underwriting profitability for insurers during this period,” the report says. “Though personal auto insurers earned underwriting profits for several years in the first decade of this century, personal auto insurers had combined ratios under 100 in only three years between 2009 and 2022, meaning that personal auto insurers earned underwriting profits in only three years of that period,”

The report notes that states use various regulatory approaches in seeking to ensure that personal auto insurance rates comply with state law. It says the most common regulatory structure is known as “file-and-use.” This requires insurers to file their rates with the state insurance regulator but allows them to begin applying the filed rates before obtaining regulatory approval. As of 2019, 28 states and the District of Columbia use some variation of file-and-use rate regulation, the report says.

File-and-use- is a subset of “competitive rating,” the report says. The regulator relies on the market to keep insurance rates consistent with underlying economies in competitive rating, it says. The regulator still reviews rates and may disallow those it finds inappropriate. States can also assess compliance with market conduct regulations through examinations.

Insurance companies continue to use “proxy factors” such as age, credit history, education level, gender and marital status in the underwriting process, the report says. It defines proxy factors as information that may be beyond a customer’s control or may not seem directly related to hazards associated with driving an auto.

State laws generally permit insurers to use actuarially supported proxy factors. However, some states and The National Association of Insurance Commissioners (NAIC) is reviewing the appropriateness of certain proxy factors, including whether their use limits economic mobility, the report says.

State regulators and other stakeholders are also evaluating the use of AI and usage-based insurance (UBI), the report says. It says the technologies could align premiums more closely with driving behavior but also raise consumer concerns about security, privacy and transparency.

The report recommends that state regulators continue to monitor and analyze the cost and availability of personal auto insurance for consumers, along with continuing to build existing efforts to reduce the frequency and severity of crashes to lower insurance costs.

State legislatures, insurance regulators and NAIC should also continue to monitor the use of proxy factors, the report recommends.

The report also recommends state insurance regulators and NAIC should continue to focus on insurers’ use of and the effects of AI.

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