What if Auto Claims Just Keep Dropping?

This week’s announcement by the National Insurance Crime Bureau (NICB) that vehicle theft is down by more than 50% compared with 1991, despite an increase in population and registrations of more than 60 million cars, caused me to consider the much bigger implications of shrinking frequency in the entire category of auto claims and what it means to the $200 billion-plus U.S. auto insurance industry. In an impressive achievement, auto claims frequency has been creeping down slowly but surely since the 1986 new vehicle model year, when high-mounted brake lights became standard equipment by federal mandate. While fluctuations did occur in some years, caused by a variety of macroeconomic factors, the trend is assuredly downward. Factors include an aging driver population, reductions in miles driven because of a protracted recession and increasing gas prices, increased migration to more urban areas and the emergence of alternative transportation models. Without becoming distracted by the nuances of frequency variations between various lines of auto insurance coverage (physical damage; collision and comprehensive and liability; bodily injury and property damage), the fact is that the net overall accident frequency trend continues downward. Indeed, adjusted loss ratios for auto insurance carriers fell to an industry average 65.8 in 2013, and some carriers posted even better results. Lower auto claim frequency was clearly a factor. Add to this: the increasing introduction by almost all automakers of driver-assist and crash-avoidance technologies; the rapid penetration of telematics that enable real-time driving hazard and safety alerts; and the specter of fully autonomous (self-driving) vehicles coming faster than anyone might imagine. Further dramatic auto claim frequency reduction can be considered a certainty. The auto insurance premium pie is set to get smaller. Younger consumers, increasingly urban dwellers, are shunning vehicle ownership for improved public transportation systems, municipal-sponsored bicycle-sharing programs and vehicle and ride sharing. And, over the recent prolonged recession, those who did purchase auto insurance become comfortable with higher deductibles as a means of reducing premium costs. That behavior is not likely to change. Usage-based insurance (UBI) programs, at least so far, have attracted mainly drivers with safer records, as well as low-mileage drivers. So, UBI has further eroded auto premium. The claim and loss-cost improvements from these programs anticipated by carriers may or may not materialize in time, but that will depend on carriers learning to leverage data and create custom products much more effectively. Ironically, the auto claim was known as “the moment of truth” for auto insurers – their chance to reinforce the loyalty of policyholders by making good on their service promises at a challenging time for the customer. As the number of opportunities for carriers to provide claim service excellence diminishes, they will have to find alternative customer engagement strategies. Risk reduction and accident avoidance could just be that opportunity. Regardless, the bottom line is this: Auto insurance carriers (as well as their key trading and supply chain partners) should start today to position themselves to survive in a market that is slowly but surely shrinking and changing.