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  • Writer's pictureJay A. Hines

The Impact of Rising Auto Claims Severity on Insurance Business

The year 2020 brought unprecedented changes to many aspects of our lives, including the way we drive and the number of auto insurance claims filed. As the world grappled with the COVID-19 pandemic, shelter-in-place restrictions resulted in a significant drop in miles driven and a corresponding decline in the frequency of auto insurance claims. However, as these restrictions eased and life returned to a semblance of normalcy, insurers began to experience a rebound in both miles driven and claims frequency. What is concerning, though, is the concurrent rise in auto claims severity, which is putting a strain on insurance business lines. In this article, we will explore the factors contributing to this trend and its potential impact on the insurance industry.


The Rebound of Miles Driven and Claims Frequency

As the United States emerged from the pandemic, the U.S. Department of Transportation's Federal Highway Administration estimated a nearly 30% increase in miles driven during the second quarter of 2021 compared to the same period in 2020. This surge in miles driven is a clear indication that people are returning to their pre-pandemic driving habits. Major insurers like Progressive Corp. and Berkshire Hathaway Inc.'s GEICO have reported that their policyholders' miles driven and claims frequency are moving towards pre-pandemic levels. Progressive, for instance, witnessed a 19% increase in claims frequency during the first six months of 2021 compared to the previous year.


The Troubling Rise in Auto Claims Severity

While the decline in claims frequency during the pandemic was a welcome relief for insurers, it did not come without consequences. Despite the drop in frequency, auto claims severity has been steadily rising in recent years and accelerated during the pandemic. Progressive and GEICO, for example, have experienced a consistent increase in accident severity over the past few years, particularly within bodily injury coverage. Inflationary pressures and a rise in more serious accidents have contributed to this upward trend.


The Alarming Increase in Fatalities

The rise in auto claims severity is further compounded by an alarming increase in fatalities during motor vehicle accidents. The National Highway Traffic Safety Administration's data shows a significant year-over-year increase in fatalities starting in the third quarter of 2020. According to estimates, there was a 10.5% increase in traffic accident fatalities in the first quarter of 2021 compared to the previous year. Although estimates for the second quarter of 2021 have not been released, it is evident that the trend of rising fatalities continues.


Factors Driving Auto Claims Severity

Several factors contribute to the increase in auto claims severity. Higher medical care costs, rising prices of new and used cars, and larger bills for vehicle repair all play a role in driving up the cost of claims. Insurers such as Allstate Corp., Liberty Mutual Holding Co. Inc., and Progressive have cited higher used car valuations as a contributing factor to the year-over-year increase in severity within their collision coverage. The increased cost of total losses, due to higher used vehicle prices, puts additional financial pressure on insurers.


The Impact of Inflation and Rising Costs

Inflationary pressures have a significant impact on auto claims severity. The cost of medical care, vehicle parts and equipment, and maintenance and repair has been rising steadily. Consumer pricing data from the U.S. Labor Department reveals that used car and truck prices, although leveling off and even declining slightly in August, are still up nearly 40% compared to December 2019. Similarly, the prices of vehicle parts and equipment, as well as the cost of maintenance and repair, have seen significant increases.


The Potential Deterioration of Insurance Business Results

With claims severity remaining elevated and claims frequency rebounding to pre-pandemic levels, there is a concern that insurance business results may deteriorate further within the personal auto line. The industry reported a direct incurred loss ratio of 66.0% during the second quarter of 2021, the highest quarterly ratio since the fourth quarter of 2018. This indicates that insurers are facing higher costs in relation to the premiums they collect. If this trend continues, insurers may need to reassess their pricing models and underwriting strategies to maintain profitability.


Strategies to Mitigate the Impact

To mitigate the impact of rising auto claims severity, insurers can take several measures. Implementing stricter underwriting practices, such as reviewing driver records and assessing risk factors more accurately, can help identify high-risk policyholders and price their premiums accordingly. Additionally, insurers can leverage advanced data analytics and predictive modeling to gain insights into driving patterns, identify potential fraud, and optimize claims management processes. By adopting a proactive approach to risk management, insurers can better navigate the challenges posed by the current trends.


Conclusion

The rebound of miles driven and claims frequency as the impact of the COVID-19 pandemic wanes has brought about a concerning rise in auto claims severity. As insurers grapple with higher medical costs, rising prices of new and used cars, and mounting bills for vehicle repair, they face the challenge of maintaining profitability within the personal auto line. By implementing effective risk management strategies and leveraging advanced analytics, insurers can mitigate the impact of these trends and ensure the sustainability of their business. As the road ahead remains uncertain, adaptation and innovation will be crucial for insurers to navigate the evolving landscape of auto insurance claims severity.

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