Let’s say you are a first-time car purchaser this month, making ready to maneuver exterior of a significant US metropolis*.
Your used car is not as low-cost as it might’ve been six months in the past, but it surely’s high quality. You’re making an uncomfortably massive down cost as a result of rates of interest are excessive. Before you drive away, you simply must kind out insurance coverage.
Normally that is an afterthought. But not this yr.
In reality, your car might need to sit down on the lot for a day or two whilst you store round for a coverage that is not exorbitantly priced. You’re not uniquely uninsurable, however US auto insurers have been dropping cash on underwriting insurance policies, and costs are going up quick.
Shares of firms with massive auto-insurance companies — ones that commerce with out the safety of Warren Buffett’s imprimatur, a minimum of — have began to replicate these points. Take Allstate and Progressive:
It is not complete market mayhem, but it surely is not precisely copacetic, both. Auto-insurance losses had been a part of the rationale Fitch Ratings downgraded Allstate’s credit score to BBB from A- this week, as auto-policy underwriting is the insurer’s largest line of enterprise by premiums collected. Allstate additionally offered $600mn in most well-liked shares earlier this month with a 7.375-per-cent yield, a comparatively broad unfold over Treasuries. That suggests administration is “comfortable at [a] lower rating”, BMO analysts wrote after the sale.
Progressive is holding up better, analysts at CreditSights say. But they are still downbeat on the entire industry. “After having fun with outsized profitability in direction of the beginning of the pandemic circumstances with a considerable decline in miles pushed, inflationary pressures have been significantly acute,” they wrote.
The pressures on auto-insurance profitability have been caused mostly by unexpected “severity” rather than “frequency”. That means insurers aren’t paying out on policies more often, but they are paying higher amounts.
To put it simply: It’s not because more car accidents are happening, but the insurers’ average cost of car accidents (both those that are already paid and those that they expect to pay) are higher.
Here’s what Tricia Griffith, the chief executive officer of Progressive, told investors and analysts in the company’s first-quarter earnings call. With our emphasis:
We saw higher-than-expected severity trends in previously closed claims in personal auto primarily in fixing vehicle coverages. While I won’t speculate on why these trends changed, I can tell you that we reacted quickly and decisively. to adjust our reserves for these short-tailed coverages. I’m confident in the people and processes we have in place to ensure we’re adequately reserved. , ,
Now, there’s a lot that goes into the severity of fixing cars. And so a couple of things. We have really — and I think as an industry — struggled with shop capacity. So our ability to get cars in and the throughput to get them out, which of course have an effect on length of time, rental, et cetera. Parts prices are up just a little bit under 3%, and labor rates are up, so think of the unemployment rate and how there’s a problem kind of hiring everywhere. Same thing with mechanical techs in the body shops. But those repair rates are up between 4.5% and 5%. So that’s some contributions.
Rising auto prices and high demand have indeed played a large part in the long-term trend of higher auto-insurance costs.
The Manheim Used-Vehicle Index shows used-car prices were 8 percent higher in 2022, on average, than they were the year before, though prices have more or less stabilized since December. Not only are replacements for totaled vehicles pricier, repairs are more expensive as well, as the cost of car parts and services rose last year as well, according to BLS data.
There may be more to it than supply-chain problems and labor costs, however.
Progressive’s biggest first-quarter increases in severity came in the “bodily damage” and “property injury” classes, based on its 10-Q. Both of these classes look like for accidents the place the coated driver is discovered to be at fault:
Allstate’s Mario Rizzo stated within the firm’s 1Q earnings name that stabilization of auto costs was greater than offset by the next share of automobiles that had been totaled in wrecks. He stated that severity was estimated to be 9 to 11 % greater within the first quarter than full-year 2022:
Actually, used car costs or complete values for used automobiles truly got here down somewhat bit within the first quarter in our numbers, however we had the next share of complete loss frequency which impacted the combination, so these are actually the drivers. And on bodily damage, it is the identical issues we have been speaking about, medical inflation, medical consumption, legal professional illustration.
So I feel the drivers of severity proceed to persist. In phrases of the place they’re going ahead, it is actually anyone’s guess, however I feel our perspective is, and we have been fairly constant at this level, we’re going to proceed to take costs up. We’ve been doing that actually for the reason that fourth quarter of 2021 all through final yr.
The insurer additionally needed to reestimate its reserves (the quantity it expects to pay for claims) within the fourth quarter of 2022 to replicate the next, amongst a number of different issues:
Increases in damage coverages replicate current information and up to date assumptions associated to severity of third-party bodily damage claims, elevated claims with legal professional illustration, litigation prices, elevated medical remedy utilization and better medical inflation.
So victims of car wrecks and their legal professionals are getting extra aggressive (cannot think about why), and so they presumably even made an enormous push within the first quarter (puzzling). Or wrecks are getting rarer however worse for no discernible purpose.
Whatever the trigger, executives at each Allstate and Progressive have talked at size about elevating costs. Allstate touted a 22-per-cent drop in newly-issued functions in its 1Q presentation, with particularly steep declines in three states the place it has confronted challenges to elevating charges.
Still, the metric used to judge profitability of auto underwriters, the “combined ratio”, reveals that Allstate continued to lose cash on its auto underwriting within the first quarter, whereas Progressive simply barely eked out a revenue.
In different phrases, this does not seem like a “greedflation” story for the auto insurers simply but.
,This hypothetical could or could not have something to do with current occasions on this correspondent’s life.