A welcome reprieve: auto rates are leveling out as claims volume shrinks.

Drops in the number of claims filed and successful crackdowns on insurance fraud and abuse should help produce the smallest increase in average private-passenger automobile premiums in four years, according to a new projection from the Insurance Information Institute.

Revising the 6% increase the institute projected in its Earlybird Forecast report released in January, it now foresees average rate increases of just 3.5% in 2004, compared with the 7.8% increases seen in 2003. The average for a 2004 auto policy is estimated at $871, up just $29 from the year before, Ill projects.

The revised forecast follows February's announcement that State Farm Mutual Automobile Insurance Co., the nation's largest writer of private-passenger auto coverage, had cut average premiums in 10 states for 2004. USAA, an insurance and financial-services provider that serves military members and their families, also has announced cuts of between 2.2% and 5% in such states as Texas, New Jersey and Louisiana.

Although natural softening of the market after several years of rate increases, as well as better opportunities for investment income in a more favorable economic climate, both play a role in the trend, according to Bob Hartwig, chief economist and senior vice president of Ill, the largest driving factors have been improvements in loss costs.

"If you go back a few years, insurers were paying $1.10 or more on every dollar collected from their auto policies, whereas today, some of the bigger ones have managed to get it down to the low and mid-90s," Hartwig said.

The lower costs are being passed on largely through discounts for persistency and safe drivers, Hartwig noted, as insurers seek both to hold on to their own policyholders and attract the best customers away from their competition.

According to A.M. Best Co. state rate-filing data, several other major auto insurers also have cut their base private-passenger auto rates in a number of states. Subsidiaries of Farmers Group have filed for base rate cuts of between 0.46% and 1.4% in Nebraska, while neighboring Kansas will see a 0.4% cut by three companies in the Safeco Insurance Group and cuts of between 0.1% and 1.7% by Geico. Progressive, the nation's third-largest auto insurer, also is cutting its base rate 4% in Pennsylvania.

Leading the trend toward lower loss costs has been a precipitous decline in claims filed, which Hartwig said could be attributed to any number of factors, ranging from an aging and thus potentially more responsible population of drivers, to the relatively small number of catastrophe events, to a decision on the part of individual policyholders to avoid filing claims unless absolutely necessary so as to avoid increases in their premium rates.

Crackdowns in several states seeking to stamp out auto fraud also have played a role, Hartwig said. He pointed to New York as a state where stepped-up fraud-prevention measures are "moving in the right direction, but not quite there yet."

Contrasted with New York, Hartwig said, is the state of Massachusetts, where a whole host of suggested reform measures are "just not happening."

Unlike most states, where insurers file auto rates and regulators either may or may not have authority to deny those rates, Massachusetts' Division of Insurance sets a single rate for every insurer in the state to use. According to division spokesman Chris Goetchus, claims frequency in the state continues to rise, with losses from both property-damage liability and bodily-injury liability predicted to rise again this year.

Also contributing to moderating premium trends has been the fact that auto-theft rates have stayed relatively flat, Ill reported. With 1.25 million vehicle thefts in 2002--estimated at $8.2 billion in losses--the theft rate per 100,000 rose 0.4% that year, the third consecutive year an increase was seen following a period from 1990 to 1999 that saw 10 consecutive years of decline, according to the FBI.

Average EXPENDITURES ON AUTO INSURANCE, 1995-2004

A decrease in claims and successful crackdowns on insurance fraud
could help produce the smallest increase in average private-passenger
auto premiums in four years, although the estimated total expenditure
for 2004 is expected to climb by $29 million.

1995     $668
1996     $691
1997     $706
1998     $704
1999     $683
2000     $687
2001     $718
2002 *   $781
2003 *   $842
2004 *   $871

* Ill estimates based on U.S. Bureau of Labor Statistics CPI data,
company filings and trend projections.

Sources: National Association of Insurance Commissioners, Insurance
Information Institute