Inflation, Loss Severity May Curb Nonstandard Auto Market’s Positive Momentum

Players in the U.S. nonstandard auto insurance segment may find that return to pre-pandemic norms, with greater loss-cost pressures along with elevated inflation and supply chain issues, may counteract recent positive market trends, AM Best reports.

Also, smaller players in the market may find it increasingly difficult to compete with larger players with their technology and analytics advantages. That could mean more mergers ahead.

The Best’s Market Segment Report, “Inflation and Loss Severity Counteract Tailwind form Pandemic Recovery for Nonstandard Auto Insurers,” states that direct premiums written rose by 11% in the first quarter of 2021 and 13% in the second, compared with the same periods in 2020, representing the highest quarterly percentage gains since the start of 2018.

AM Best, which has a stable market segment outlook on the private passenger nonstandard auto segment, is estimating direct premium of $17.8 billion for 2021, which would represent a year-over-year 7.2% increase. The segment’s combined ratio for 2020 was 99.6%, a 1.4-percentage-point improvement from 2019, driven in large part by decreased loss frequency from reduced miles driven due to the COVID-19 pandemic.

However, the report notes that whether the premium momentum of first-half 2021 will last through the rest of the year remains uncertain. Economic recovery and reduced unemployment should continue to propel premium growth, but worsening results through first-half of 2021 due to loss-cost pressures indicate that recent positive trends have ceased.

Additionally, according to the report, higher fraudulent claims costs have weakened underwriting profitability in the AM Best composite of writers of private passenger nonstandard auto.

Nonstandard auto companies may need to “step up their efforts to find the right mix of technology and infrastructure to help thwart fraud attempts. Companies lacking these capabilities may find themselves more vulnerable, and potentially, at a competitive disadvantage,” the report states.

In addition, AM Best believes that efficient technology platforms with extensive, highly credible data sets and multivariate rating analyses have helped some of the large national private passenger auto insurers expand their presence in the nonstandard market. However, the resulting competitive pressure on smaller writers has prevented some from remaining in the market. With the nonstandard market seeing accelerated growth at the same time, merger and acquisition activity likely will increase, AM Best predicts.