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With Premiums on the Rise, What’s the Truth about Auto Insurance?


car insurance (State Farm/Flickr)

To quote Nobel Prize winner Bob Dylan, “You don’t need a weatherman to know which way the wind blows.”

You certainly don’t need TTAC to tell you auto insurance premiums are on the rise. You already know rates are trending up, well in excess of inflation. Nonetheless, let’s unpack some of the factors that have the average American now spending more than $100 per month on auto insurance.

First, let’s verify our experience with some facts. According to the Bureau of Labor Statistics, the average auto insurance premium per passenger vehicle in the United States increased 16.8 percent between 2009 and 2013, against consumer inflation of 8.6 percent over the same period. Based on data from AAA, the average American spent $1,222 in auto insurance premiums last year, which is consistent with research findings from Consumer Reports and the National Association of Insurance Commissioners.

The five largest auto insurers, State Farm, Geico, Allstate, Progressive, and Farmers, control 53 percent of the market. These five companies collected a combined $96 billion in auto insurance premiums in 2013. I am a capitalist, so I have no problem with companies seeking and earning a profit. However, their close cooperation through a labyrinth of industry non-profits as well as their extensive state and federal lobbying apparatus are cause for caution when dogging into the numbers.

What factors — other than the profit motive — impact auto insurance premiums and can they be quantified through reputable sources?

Americans drive almost twice as many miles as we did in 1980 and the number of Americans with driver’s licenses increased from 145 million in 1980 to more than 210 million today. One oft-cited stat, that the total of American roadways is up only six percent over the same period, is misleading. The total number of paved road-miles is up almost 11 percent and the total of freeway road-miles is up 23 percent, mitigating to some extent our increase in road usage.

What’s not controversial is that over the same period our average time spent in traffic congestion has more than doubled to 42 hours per year. In 2015, we racked up a total of 3.15 trillion miles. And as more miles are driven and on-road hours logged, more collisions occur. The volume of auto insurance collision claims reflect this, increasing in 14 of 16 quarters between 2011 and 2014. Almost seven out of every 100 insured vehicles had a collision claim in 2015.

Claims are now more frequent, and, to make matters worse, they are getting more expensive. The cost per claim was up 4.7 percent in 2015 to an average of $3,350, for a total of $21.4 billion. Nonetheless, the increasing frequency, severity, and cost of auto collisions does not account for the majority of the increase in insurance premiums.

Two other major expense categories for insurers are bodily injury and personal injury. Thankfully, cars are safer today. Vastly safer. Between 2005 and 2013 bodily injury claims tumbled 14.5 percent to 0.8 claims per 100 insured vehicles. Likewise, personal injury claims declined 15.6 percent to 1.25 per 100 vehicles. However, according to the Insurance Research Council (an insurance industry funded entity), the cost for these claims have skyrocketed. The cost per bodily injury claim increased 32 percent between 2005 and 2013, to $15,500 per occurrence. And personal injury claims are up over 38 percent to more than $8,000 each. The combined cost to insurers was nearly $31 billion in 2013.

When the decline in claims volumes and the increase in their average cost are baked together, the total increase in the cost of bodily injury claims to insurers was 14 percent between 2005 and 2013. The cost of personal injury claims increased 16 percent. Motorists and their passengers are substantially less likely to be injured in a collision, but the rising cost of treating those injuries has far outstripped the decline in their frequency.

What about insurance industry profitability? If insurance companies are raising premiums in lock step with increases in their cost of claims, then their profitability should be steady. Fortunately, most large insurers are publicly traded, meaning profitability information is easy to come by. The insurance industry uses underwriting profit, the difference between premiums earned and losses incurred, as its primary profitability metric. For example, a underwriting profit of 96 would generally be considered healthy by industry insiders, and indicates that out of every $100 an insurer collects in premiums it keeps $4.00 as profit. This represents a thin margin compared to many industries. For example, the auto industry operated at an average eight percent profit margin in 2015. Using underwriting profit as a proxy for profitability may be a shortcut, but is nonetheless a reasonable yardstick.

The Insurance Journal recently found that across the top 11 publicly traded auto insurers, their underwriting profit on personal auto insurance policies fell from 95.9 in 2014 to 97.3 in 2015. In other words, after paying out insured losses, these 11 companies kept $2.70 out of every $100 in premiums they collected in 2015. Allstate, the second largest insurer in the data set, reported an underwriting profit of 99.9 in 2015, down 5.1 percent from the previous year.

Now, before we discount the data by pointing to its source or the prevalence of financial engineering in the generation of financial statements, consider that most executives of publicly traded companies are highly incentivized to deliver higher stock values. Allstate’s executives are so incentivized. However, Allstate’s stock price fell 13 percent between the end of 2014 and the end of 2015. And so did Allstate CEO Thomas J. Wilson’s compensation, dropping 15 percent, or a material $2.3 million. Measured broadly, industry profitability was down almost six percent last year and eight out of the 11 companies analyzed were less profitable in 2015 than they were in 2014. Three reported losses.

Industry watchers are bearish on the auto insurance sector. According to Jim Auden, Managing Director at Fitch, one of the three major credit ratings agencies, “Stronger underwriters like Progressive consistently hit their 96 combined ratio target [underwriting profit], but the industry as a whole is not making money in Auto. While insurers are getting rate, that increase ends up offset by rising claims.”

In short, insurance companies got hit with unexpectedly sharp increases in bodily and personal injury claims expenses, which were compounded by modest gains in collision claims losses. They have collectively responded with rate increases, however the cost of their losses have risen faster than their rate increases. One additional factor to consider when comparing the information presented here with your personal experience, is that auto insurance is largely regulated at the state level, which results in significant regional disparities. For example, a motorist in expensive Michigan could move south across the border to inexpensive Ohio and reduce their auto insurance bill without reducing their overage by a whopping 67 percent.

Extortionate healthcare costs strike again. Each year we spend twice as much per capita on healthcare as the developed world average. And as large as the auto insurance industry is, it is dwarfed by the $3 trillion juggernaut of healthcare. Unless you believe the trend in healthcare costs is going to change, you should expect it to exert an ever-increasing influence over your auto insurance premium.

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