AM Best: Adverse Results Linger For Nonstandard Auto

AM Best reported a net underwriting loss of $333 million for the U.S. nonstandard auto insurance segment during the first half of 2023 — a year-over-year improvement from the $773 million loss seen in the first six months of 2022.

Nevertheless, in a recent market segment report, the rating agency shared that the results of the companies that make up its private passenger nonstandard auto composite reflect “persistent rate inadequacy concerns, as well as inflationary pressures that have contributed to rising claim costs.”

Labor market issues impacting auto repairs and losses from natural catastrophes also contributed materially to the recent negative trends. Comparing the first half of 2022 to the first half of 2023, the segment’s combined ratio improved only slightly, from 113.5 to 111.2.

AM Best said that on a direct basis, the nonstandard auto liability loss ratio was worse in the first half of 2023 than the first half of 2022, but the auto physical damage loss ratio was more favorable, helping the overall direct loss ratio to be only slightly lower.

“The adverse results are lingering despite efforts to use available data tools and technology to effectively address rising loss costs, achieve greater rate adequacy, and address loss severity trends,” said AM Best, in the report. “Recent data suggests that distracted driving and poor driving habits have played a role in the deterioration of personal auto results.”

According to the report, the push for premium adequacy has resulted in record-setting quarterly premium volume, with direct premium written (DPW) eclipsing $6 billion for the first time in a single quarter during Q1 of 2023.

“The need for higher premiums demonstrates the prevailing effect of inflation on loss costs and the efforts of nonstandard auto insurers to catch up with, if not get ahead of, those negative trends,” said David Blades, associate director of industry research and analytics at AM Best. “These efforts may result in some progress in offsetting higher claim costs, partially mitigating the recent upsurge in the composite’s combined ratio and worsening underwriting losses.”

According to AM Best, standard and nonstandard auto insurers file their insurance policies with state regulators. The nonstandard designation applies to drivers who are too risky for insurance companies to cover at their standard rates and who thus fall at the most expensive end of the pricing spectrum.