Best's special report looks at personal auto insurance.
Loss Frequency Drivers
While determining specific causes behind changes in claim count trends is not an exact science, an increase in miles driven resulting from lower gasoline prices, reduced unemployment rates, and an increase in vehicles overall were definitely contributing factors. Furthermore, the rise in accident frequency has also been associated with growing levels of distracted drivers and higher average speeds on many of the roads and highways throughout the country.
According to a recent study released by the National Highway Traffic Safety Administration (NHTSA) and the Virginia Tech Transportation Institute (VTTI), 80 percent of automobile accidents and 65 percent of near-accidents involve at least some form of driver distraction within three seconds of the crash or near-miss. Distracted driving is now the number one cause of automobile accidents, ahead of speeding, drunk driving, reckless driving, and rain. The combination of increased frequency and the fact that claim costs are also rising, means insurers will likely continue to confront similar challenges until the technology designed to reduce accident frequency experiences greater market penetration.
Loss Severity Drivers
Profit improvement among private passenger automobile insurers has been constrained for some time by persistent increases in claims severity. Rising automobile claims severity has been partly attributable to medical cost inflation and higher repair costs. With new and used automobile pricing continuing to increase, the cost of maintaining and repairing vehicles made of more technologically refined materials, and replacing more intricate devices and equipment within a vehicle, is growing. The rise in claims severity in 2015 occurred across all major coverages including: bodily injury, property damage, and collision. While BI has had a significant impact on profitability for years, the rise in frequency and severity on the physical damage side is also impacting margins across the industry.
Higher speed limits and vehicle horsepower may also be contributing factors in the recent increase in fatal crash rates. Deaths per 100 million miles driven had been declining markedly since the mid-1930s,from fifteen to just over one. However, in 2015, this trend reversed, and the National Safety Council (NSC) reported an 8 percent spike in road fatalities between 2014 and 2015, the largest annual increase in 50 years. From model year 1985 to model year 2015, mean vehicle power, defined as horsepower per 100 pounds of vehicle weight, increased by 60 percent for cars, 65 percent for pickup trucks, and 66 percent for SUVs, according to data from the Highway Loss Data Institute (HLDI). Since Congress repealed the National Maximum Speed Limit in 1995, six states have 80 mph limits, and drivers in Texas can legally drive 85 mph on some highways. In 34 other states, speed limits are as high as 75 mph.
Severe winter weather in 2014 and 2015 in many parts of the U.S. also led to increases in collision and liability losses, as more drivers were on the road and encountering icy or wet conditions. Losses from hailstorms and flooding have driven up automobile comprehensive claim counts in recent years as well, particularly in early 2016.
Adapting To Change
Given the increasing pricing sophistication, the ultra-competitive nature of the market, and progressively higher customer expectations, simply raising rates can no longer be a singular strategy for combating a rise in loss costs. While pushing through rate increases will certainly be part of the overall solution, technological and analytical advances are putting increased pressure on insurers to refine underwriting and rating like never before, while simultaneously elevating the customer experience. Those companies that fail to keep pace with technological advances will continue to be susceptible to adverse selection.
Given the recent deterioration in underwriting results, there has been a renewed push by automobile writers to address premium leakage, which is revenue lost through misreported or omitted underwriting information. According to Verisk Insurance Solutions, premium leakage is costing automobile insurers an amount equal to between 10 and 15 percent of DPW annually. Verisk found more than 80 percent of insurance leaders are at least "moderately concerned" over premium leakage, with nearly half indicating that they were "very concerned" or "extremely concerned." Insurers, however, have access to many tools to achieve and maintain a better balance between premium and risk. Since underestimated mileage accounts for approximately one-fifth of leakage and strongly correlates with frequency, accurately capturing miles driven over a policy term can help refine pricing and stem rising losses. Many new tools, including sophisticated analytics, smartphone apps, telematics, and connected-car data, can help empower insurers. Using predictive modeling that factors frequency and severity by make and model can also help insurers adjust to the higher repair costs of today's newer vehicles.
Disparities in frequency and severity trends among many personal automobile insurers highlight the importance of data and analytics in driving underwriting results. Capturing large volumes of data from real-time sources can help insurers develop new products and refine pricing strategies. Advanced analytics, when combined with a sound operating strategy, can materially increase underwriting profitability and provide a valuable market differentiator.
Premiums in the personal automobile arena have been expanding at a fairly strong rate over the last few years, partly in response to the increase in loss costs. However, there has been widespread speculation that over time, the automobile premium base will contract due to emerging forces within and outside of the industry. While the projected timeline and ultimate magnitude of these impacts are up for debate, there is little doubt that technological innovation, the evolution of autonomous vehicles, services such as Uber and Lyft, and the potential rise of non-traditional competitors will have an impact on the industry over the long-term.
Currently, car technology can be defined in 6 levels, from traditional vehicles (level 0) to fully autonomous vehicles (level 5). Level 1 vehicles consist of vehicles where steering or braking/accelerating are augmented by a driver assistance system, whereas level 2 consist of vehicles where steering and braking/accelerating are done by a driver assistance system. Levels 3 and 4 consist of partially autonomous vehicles where autopilot performs the driving task under defined circumstances. Level 5 consists of fully autonomous vehicles where the driving is solely performed by autopilot in all roadway and environmental conditions.
In recent years, car technology has improved dramatically as evidenced by the increasing prevalence of features such as adaptive cruise control, emergency braking, and lane control in newer vehicles. As technology continues to advance and an increasing number of vehicles on the road fall into the higher levels, it is expected that the number of accidents will be reduced due to safety advancements. This, in turn, could lead to a contraction in automobile premiums. There is also the possibility that consumers will forgo the automobile purchase, opting to take advantage of ride-hailing, ridesharing, and car-sharing proliferation that has taken place with the advent of services such as Uber and Lyff. This would further pressure the top line of personal automobile writers.
These developments could also cause premiums to shift from personal lines to commercial lines in the longer-term as vehicles, rather than drivers, become the cause of accidents. In addition, the increasing usage of shared mobility solutions could lead to a rise in the number of fleets and commercial vehicles.
The ultimate impacts of these developments are understandably hard to predict. For example, the magnitude of premium contraction will be dependent upon a multitude of factors, including: how many level 1-5 vehicles are on the road, what level of frequency benefit is realized, and the level to which the cost to repair these more sophisticated vehicles offsets any frequency benefits. In addition, the level that automobile ownership will fall by due to the continued proliferation of shared mobility solutions will influence the top line of personal automobile writers. Lastly, the rate of adoption of autonomous vehicles will also influence how quickly personal automobile policies are replaced by product liability policies.
Recognizing that these developments could eventually have an adverse impact on financial results, an increasing number of companies are devoting time and resources in an attempt to better understand and predict the potential implications on their operations. Some companies are creating teams within committees embedded in the enterprise risk management framework that are devoted to staying abreast of the developments within these areas. Through research, reviewing literature, and modeling potential impacts, these teams are keeping their respective Boards of Directors apprised of key developments. Included in this analysis is the heightened threat that non-traditional players could enter the marketplace as data may no longer be owned by the insurer, allowing others to perform their own analytics and potentially manufacture insurance policies.
Underwriting profitability for the personal automobile industry has shown deterioration in recent years, driven by adverse claim frequency and severity trends. Reversing this trend in the face of current market headwinds will be a challenge that personal automobile insurers have to face. Generally stable macro-economic conditions, prolonged lower gas prices, and increased miles driven are likely to continue to pressure bottom-line results in the near-term. Companies need to maintain awareness of rapidly changing technological advancements and possess the flexibility to adapt to changing market conditions. The successful ones will continue to rely on adherence to sound underwriting and pricing fundamentals, in spite of the heightened level of competitiveness prevailing at present. Those companies that can execute on the blocking and tackling aspects of underwriting and claims over the near-term, while incorporating the meaningful evaluation of emerging threats into their enterprise risk management framework, will be the most well-prepared for the automobile market of today and tomorrow.
The complete version of this Best's Special Report is available at www.ambest.com.
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|Title Annotation:||What A.M. Best Says|
|Date:||Feb 1, 2017|
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