Personal Auto Rate Hikes Not Keeping Up with Losses: Fitch

U.S. personal auto underwriters increased premium rates “significantly” in 2016, but the rate increases weren’t high enough. Loss trends are still outpacing rate changes. Also, the U.S. P/C industry statutory combined ratio will likely hit 108 in the coming months, a 3.5 percentage point rise and the weakest result in 15 years, Fitch Ratings noted in a new report, “U.S. Personal Auto Underwriting Weakens (Pricing Actions Unable to Repel 2016 Deterioration).”

“Results are likely to improve moderately in 2017, but competitive forces and market fundamentals will inhibit a shift back to an underwriting profit in personal auto for some time,” the report said.

A number of factors indicate the market is still weakening, Fitch said. GAAP auto segment results show higher combined ratios for nearly all of a group of 10 publicly traded insurers in 2016, with an average combined ratio increase of 3.3 points from 2014 to 2016.

Carriers generated major underwriting profit for personal auto despite industry weakness. But the overall market continues to weaken in annual underwriting performance because of higher catastrophe-related losses and unfavorable claims experience, the report explained.

Personal auto underwriters face adverse loss trends that drove higher claims costs in the past two years, including claims frequency jumps from more miles driven, more distracted driving, higher physical damage losses because of more complex automobile parts, and higher bodily injury costs from more severe accidents.

Consumer Price Index data for auto insurance costs grew by 7.6 percent in February 2017. Fitch said that points to continuing rate increases in the short term, which should lead to some modest underwriting improvements through the year.

Yet Fitch said that modeling for the sector should be better. “Personal auto insurance is technologically the most advanced P/C market segment with tremendous progress over time in data analytics that enhance risk selection, price segmentation and predictive claims models. Recent poorer results in auto insurance reveal that the most sophisticated models may not fully anticipate changes in loss cost trends.”

Fitch added that underwriters may not be paying full attention to what risk modeling tells them “due to competitive pressures and an interest in maintaining premium volume and policy retention levels.”