Between a rock and a hard market: Solutions for personal auto

By David Ayers, Brad Magick, CPCU, Dorothy Kelly

May 5, 2022 / 7 min read

The ancient Greeks first spoke about being “between a rock and a hard place”: In Homer’s Odyssey, Odysseus must pass between a cliff-dwelling, man-eating monster, Scylla (the rock), and a treacherous whirlpool, Charybdis (the hard place). We may use this idiom today when we face a dilemma between two unpleasant alternatives.

solutions-for-personal-auto

The direction of claims increasingly suggests a hard market for the industry in 2022.

The personal auto insurance market has traveled its own odyssey since the start of the pandemic, and insurance leaders may now be “between a rock and a hard market.” Let’s examine the “hard place” trends triggered by the pandemic—and the “rock” trends that may pose additional challenges in 2022.

Rock and hard market trends: The whirlpool

A confluence of factors has created a whirlpool of churning undercurrents for insurers. Consider these drastic shifts along the pandemic’s timeline:

1) Market contraction and mileage volatility in 2020: The industry’s 2020 market contraction totaled $11.5 billion in policyholder dividends, rebates, and refunds—on top of significant rate reductions—stemming from the pandemic and stay-at-home orders.¹ The contraction of 2020 was different from the type of contraction that may occur during a hard market, where insurers tighten underwriting standards and overall industry capacity is reduced. In addition, since the premium returned in the early days of the pandemic was balanced against lower mileage and reduced accidents, many insurers actually enjoyed a profit despite the contraction.

How have mileage patterns evolved? Although the drop in personal auto mileage recovered to single-digit percentage declines vs. a pre-pandemic baseline, that took place from a maximum reduction of more than 40 percent as the traditional rush hour vanished during the 2020 lockdowns.² Interstate data shows the deep impact on private passenger vehicle mileage and how it has been slower to recover than commercial mileage.

interstate-mileage-volatility-2020-to-2022

Bottom line: Including lost opportunity costs, the pandemic’s true impact on the size of the 2020 personal auto market may have exceeded 6.5 percent in terms of premium.⁴ Let’s discuss how the more complex role of mileage and other factors that followed the early stages of the pandemic has heightened premium leakage concerns for the industry.

2) Premium leakage in 2021: While 2021 looked much different without 2020’s market contraction, insurance leaders now face the challenge of pandemic-driven premium leakage. As illustrated in the graphic below, “yo-yo” mileage trends that nearly rebounded to historical patterns helped drive this problem. Young adults moved back home in greater numbers, and rate increase filings faced continued regulatory scrutiny. In addition, fraud trends have risen while application integrity has declined.

Many insurers are not doing enough to re-underwrite at renewal and true-up pricing relative to the risk represented by shifts that are occurring in more recent stages of the pandemic. Policyholders who contacted their insurers for discounts in 2020, or those who had significant lifestyle changes, may not have been as quick to alert insurers later. As a result, Verisk data now shows premium leakage rising from mileage and commute-usage rating variables—as well as other key rating factors—on many policies.

pandemic-driven-premium-leakage-is-a-concern

3) Frequency trends heading into 2022: Over recent “normal” years, accident frequency has generally been trending slightly negative due to the increasing presence of advanced driver assistance systems (ADAS) features in vehicles on the road.

However, the shifting undercurrent of frequency—which initially dropped in the second quarter of 2020—has been on an upward trajectory heading into 2022, based on available claim trend data.

pandemic-influenced-claim-frequency-trends-headed-into-2022

Having described the “whirlpool” that personal auto insurers have been navigating, we’ll consider what’s on the other side:

Rock and hard market trends: The six-headed monster

Two adjacent maritime hazards, hidden within the Strait of Messina, inspired the perils Homer described: Charybdis was a whirlpool off the coast of Sicily, and Scylla was a rock shoal on the Calabrian side of the strait, described as a six-headed sea monster.

Will insurers continue to feel the pain of the monster squeezing margins in 2022? What other factors may influence how effectively personal auto insurance leaders compete? Will their goals be dashed against the rocks? Let’s look at six trends that may represent the six-headed monster:

1) Signs of a soft market ending in 2021: Let’s bring in the severity side of the claims equation. While the pandemic’s Omicron wave temporarily paused a few rebounding trends, the direction of claims increasingly suggests a hard market for the industry in 2022.

As illustrated in the chart below, frequency is up as more drivers are back on the road more often, and claim severity—for reasons we’ll explain below—continues to climb. The net result: Pure premium returned to pre-pandemic levels in the last two consecutive quarters for which data is available.

pandemic-influenced-claim-trends-2020-to-2021-BIPD-collision-combined

Claim severity rose even more for comprehensive coverages in Q3 of last year (+39 percent), as costly flood losses from Hurricane Ida in September 2021 partially explain the spike in severity.¹⁵

Will these rising claim trends level off in 2022?

2) Signs of a hard market in early 2022: Data from Verisk’s ClaimSearch^® business shows that a leading indicator, claim counts, rebounded 15 percent in 2021, and the pace quickened year-over-year for the first two months of 2022.

claim-counts-rebounded-in-2021-on-faster-pace-for-2022

Here are the other hard-market, six-headed monster trends:

3) Supply chain: A shortage of computer chips is just one of a multitude of extraordinary disruptions the industry is facing.¹⁷ The supply chain impact on parts and delayed repairs is affecting claim costs, so both repair costs and car rental expenses are up.

4) Inflation: The Consumer Price Index for used cars and trucks has risen more than 28 percent in the past two years, including a stretch of six record-setting months heading into 2022.¹⁸ This trend is driving up the cost of total-loss claims.

5) Riskier driving behavior: The trend of riskier driving behavior that emerged after 2020’s pandemic lockdowns, and showed signs of continuing into 2021¹⁹, may be an ongoing problem for insurers and society, as U.S. Transportation Secretary Pete Buttigieg released a broad-based strategy aimed at boosting safety.²⁰

6) Digital expectations: As if the squeeze on margins wasn’t enough, the response to COVID-19 has accelerated the adoption of digital technologies by several years.²¹ To compete, insurers may need to transform.

A cure for hard times?: Potential solutions

While it will take time for the hard market to turn, here are some solutions to boost profitable growth while you’re between a rock and, well, you know…

Monitor trend and loss development to adapt rates over time. Long-run tracking and adjustments should smooth out the bumps, while some insurers are currently seeking double-digit rate increases.²² However, this solution may face regulatory hurdles and scrutiny following 2020’s financial strains on many Americans.
Revitalize personal auto book health. Recapture pandemic-driven premium leakage at renewal and align price to risk on critical rating factors that may have changed dramatically. Identify and recover missing premium at renewal to increase near-term profitability without relying solely on rate levels to achieve needed premium. Verisk provides a complimentary analysis to identify sources of leakage and quantify potential recoveries.
Accelerate digital transformation plans. With online quotes likely driving more new business, there are also opportunities to identify fraud and improve rate integrity at point of quote.
Leverage telematics to encourage safe driving behavior. Providing driver feedback can promote safety, and using a driving score can help price policies based on actual driving behavior—even rewarding good drivers at point of quote.
Capture more accurate mileage. Take advantage of recent enhancements to measure this rating factor and learn how one insurer gained 7.2 percent lift by leveraging more accurate mileage in its rating plan.
Cut underwriting report expenses with innovative tools. Cost-efficient personal auto risk indicators are an innovative solution to help contain costs. They can be used in front of an insurer’s full-report ordering workflow where there is no adverse activity as part of an ecosystem of smart expense management. Similarly, insurers can save on the Inflection™ credit-based insurance score, powered by Equifax credit data, at initial quote while only ordering the full score with reason codes when a quote moves to bind.*
Leverage contributory data to execute non-rate actions quickly and efficiently. Ask a Verisk account executive about no-integration batch jobs—using policy data that’s already being contributed to Verisk—that can help identify non-rate actions around potential fraud, unidentified drivers, and more. During initial underwriting or at renewal, these opportunities can help back-office and underwriting teams connect data points and adjust rates with limited IT resources and lead times. Such measures can help align risk and generate short-term revenue during a hard market.

Verisk analysis represents a full-year 2020 estimate based on insurers’ quarterly financial reports supplemented with their public statements and additional data sources, May 3, 2022
Dorothy Kelly and Raul Retian, “Unpacking 2021’s New Normal in Personal Auto Mileage”, Verisk’s Visualize, September 14, 2021, < https://www.verisk.com/insurance/visualize/unpacking-the-2021-new-normal-for-personal-auto-mileage/>, accessed on May 3, 2022
Verisk analysis of Department of Transportation, Weekly Traffic Volume Report, 2021, preliminary estimates based on traffic monitoring roadway sensors and the Federal Highway Administration’s Performance Monitoring System < https://datahub.transportation.gov/stories/s/3g63-ik4u >, accessed on May 3, 2022
Dorothy Kelly and Raul Retian, “2021 Personal Auto Growth and Profitability: Unprecedented in New Ways”, Verisk’s Visualize, November 22, 2022, < https://www.verisk.com/insurance/visualize/2021-personal-auto-growth-and-profitability-unprecedented-in-new-ways/ >, accessed on May 3, 2022
Ibid.
Brad Magick, “Personal Auto Research: Application Integrity Down, Fraud Up”, Verisk’s Visualize, April 14, 2021; 6.4% of applications had one or more fraud triggers between 2013-2016 vs. 8.5% during 2017-2020 < https://www.verisk.com/insurance/visualize/personal-auto-research-application-integrity-down-fraud-up/ >, accessed on May 3, 2022
Verisk client experience
Richard Fry, Jeffrey S. Passel, and D’Vera Cohn, “A Majority of Young Adults in the U.S. Live with Their Parents for the First Time Since the Great Depression”, Pew Research Center, September 4, 2020 < https://www.pewresearch.org/fact-tank/2020/09/04/a-majority-of-young-adults-in-the-u-s-live-with-their-parents-for-the-first-time-since-the-great-depression/ >, accessed on May 3, 2022
Dorothy Kelly and Raul Retian, “Unpacking 2021’s New Normal in Personal Auto Mileage”, Verisk’s Visualize, September 14, 2021, < https://www.verisk.com/insurance/visualize/unpacking-the-2021-new-normal-for-personal-auto-mileage/>, accessed on May 3, 2022
Verisk client experience
Brad Magic, “How Insurers Can Optimize Their Auto Book Health”, Property Casualty 360, February 1, 2022< https://www.procom/2022/02/01/how-insurers-can-optimize-personal-auto-insurance-book/ >, accessed on May 3, 2022
Brad Magick, “Personal Auto Research: Application Integrity Down, Fraud Up”, Verisk’s Visualize, April 14, 2021; 6.4% of applications had one or more fraud triggers between 2013-2016 vs. 8.5% during 2017-2020 < https://www.verisk.com/insurance/visualize/personal-auto-research-application-integrity-down-fraud-up/ >, accessed on May 3, 2022
ISO statistical plan data, 2020-2021
Ibid.
Ibid.
ClaimSearch data, March 2022
Chris Isadore, "Auto Makers’ Problems Are Much Worse Than We Thought," CNN Business, September 28, 2021, < https://www.cnn.com/2021/09/28/business/auto-industry-supply-chain-problems/index.html >, accessed on May 3, 2022
Federal Reserve Bank of St. Louis (FRED), Consumer Price Index for All Urban Consumers: New and Used Motor Vehicles in U.S. City Average, March 2022, February 2020 to February 2022, record-setting months August 2021 to January 2022, < https://fred.stlouisfed.org/series/CUSR0000SETA accessed on May 3, 2022
Dorothy Kelly and Raul Retian, “2021 Personal Auto Growth and Profitability: Unprecedented in New Ways”, Verisk’s Visualize, November 22, 2022, < https://www.verisk.com/insurance/visualize/2021-personal-auto-growth-and-profitability-unprecedented-in-new-ways/ >, accessed on May 3, 2022
CBS News, Buttigieg Vows to Act as Car Fatalities Spike, January 27, 2022, < https://www.cbsnews.com/news/buttigieg-vows-action-car-fatalities-spike/ >, accessed on May 3, 2022
Laura LaBerge, Clayton O’Toole, Jeremy Schneider, and Kate Smaje, “How COVID-19 has Pushed Companies over the Technology Tipping Point—and Transformed Business Forever” McKinsey, October 5 2020, < https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever >, accessed on May 3, 2022

*The InitialQuote Score is patented and trademarked by Equifax.