Challenges for Auto Insurance

A new study titled “Auto Insurance: The Uncertain Road Ahead,” released by the American Property Casualty Insurance Association (APCIA), sheds light on the escalating challenges faced by the insurance industry.

The study revealed that insurance claims inflation is rising at a faster rate than the underlying consumer price index (CPI), resulting in substantial increases in auto insurance losses and combined ratios. This situation is exacerbated by a host of other factors affecting the private passenger auto insurance sector, APCIA said.

“In addition to inflation trends, the private passenger auto insurance sector is also experiencing several other trends such as increased frequency and severity of claims cost, riskier driving behavior by the public, cost increases for medical and hospital services, and outsized growth in lawsuit verdicts and legal system abuses, that are negatively impacting and pressuring the industry with increased losses,” said Robert Passmore, department vice president for APCIA and co-author of the study.

Key data findings from the study include:

• Underwriting losses for private U.S. property casualty insurers in 2022 were $25.6 billion, more than double the losses in 2021, marking the worst result since 2011.
• Private passenger auto insurance experienced the highest direct loss ratio among major lines of business at 80.2% in 2022, excluding loss adjustment expenses. This represents an increase of 12.2 points from 2021 and a staggering 24.1 points from the low-water mark of pandemic-impacted 2020.
• Claim severity for private passenger vehicle damage has risen significantly from 2018 to 2022. Property damage liability and collision claim severity increased nearly 50%, affected by rising auto repair and labor costs, inflation, and theft rates. Over the same period, average bodily injury claim severity surged by 40%, signaling an acceleration in medical inflation, legal system abuse, and a sharp rise in fatal motor vehicle accidents.
• Despite escalating losses, property casualty insurers’ premiums for personal auto increased by a mere 6% for the year, falling significantly below the 24% rate of increasing losses.
• The Motor Vehicle Insurance CPI compiled by the US Bureau of Labor Statistics, which includes the basket of goods and services that auto insurers require to settle claims, also paints a concerning picture, APCIA said. The June figure showed a year-over-year increase of 6%, marking the sixth consecutive monthly increase.

“All indicators suggest elevated auto repair and replacement costs will stretch well into 2023 and potentially beyond,” Passmore said. “Medical inflation is also accelerating. Although insurers continue to monitor the situation closely, as claim costs continue to rise, insurers may be forced to pass these loss costs along to policyholders. Given the trends, insurers are strongly encouraging drivers to minimize their risk by avoiding risky driving behaviors that may result in a loss. Insurers are also advocating for better infrastructure, including reliable supply chains for critical auto parts and safer roads, which should result in fewer accidents and lower claims costs that help keep insurance premiums affordable for consumers.”

APCIA recently issued a call for California to reform its insurance regulatory framework. In May, it spoke out against an Illinois bill that would allow for punitive damages in wrongful death cases.