Auto insurers are raising rates as fast as they can to stem mounting losses. For instance, Allstate just announced 12% increases in auto insurance rates in 12 markets, on top of a general 7.5% rise earlier this year.
But it's not clear that insurers can move fast enough — or that regulators and consumers will accept the rate increases.
Allstate had an unprofitable 110.1 combined ratio in auto last year, and the American Property Casualty Insurance Association said the direct loss ratio for the whole industry soared. It was 80.2 in 2022, up a whopping 24.1 points from 2020. So there's a lot of catching up to do.
But consumers are rebelling. J.D. Power reported that shopping for auto policies in the second quarter in the U.S. was the highest they've seen in the three years they've been tracking the behavior on a daily basis. Not only that, but J.D. Power said a TransUnion survey of insurance customers in the first quarter found that "nearly 15% of respondents said they owned or used a car without valid insurance or allowed their coverage to lapse at some point in the previous six months, with nearly 30% having cited inability to pay as the primary reason."
What happens now?
Well, as it turns out, our friends Stephen Applebaum and Alan Demers sent me an article yesterday afternoon with almost the exact headline I had on my draft of Six Things — "Auto Insurance in an Existential Crisis," in their case — and they go into "What next?" in considerable detail. So, I'll summarize their thoughts here, add a couple of my own and then, as always, encourage you to read their full piece.
The short answer is that what comes next won't be pretty. The longer answer follows.
Their article summarizes the forces we've all been reading about. Supply chains have been disrupted by the pandemic, sending prices for parts through the roof and inflating costs for cars, in general. Delays in getting parts have also raised costs by extending the length of time for which drivers need rentals. The war for talent has pushed labor costs higher. The transition to electric vehicles and the growing use of safety devices have made many repairs far more expensive or even led to vehicles' being declared a total loss. Meanwhile, the pressures from inflation and general uncertainty about the economy have weighed on consumers.
But Stephen and Alan also get into subtleties that seem to be getting overlooked. In particular, they talk about the reshaping of the collision repair industry and about how it may sustain pricing pressures for auto insurers. They note that private equity has been buying up small operations and linking them into what are known as multi-shop operators (MSOs). Insurers have, in some ways, even been driving the trend because they want collision repair shops to adopt more efficient technologies and link more tightly into insurers' claims operations. But a result has been that the MSOs now have more pricing leverage and will continue using it.
The article describes how the many attempts to reduce the frequency and severity of accidents seem to have run their course, at least for now. For instance, they say, "Telematics-supported, usage-based insurance programs enabled a large group of safer drivers to take advantage of insurance discounts, but adoption has leveled out at under 20% of policies... and distracted driving is on the rise."
Stephen and Alan predict what they call a Great Rebalancing that will likely lead to consolidation among auto insurers, as the collision repair industry flexes its muscles, as EVs and other technologies continue to drive up costs and as regulators and consumers resist increases in rates.
I'm sure they're right. The sorts of pressures facing auto insurers would, in other industries, force many to go out of business, but auto insurance isn't just something consumers want; it's required by law. So the industry will at least muddle through the current crisis.
The question is whether one or more companies will be able to innovate a way out of the crisis, keeping price increases to a minimum for good drivers while returning the industry to financial health. Supply chains have mostly healed, and inflation is declining, so some macroeconomic factors should help.
But the field for innovation is still wide open. And consumers will surely find whatever auto insurer produces the best solution.
Cheers,
Paul