APCIA looks at inflation’s impact on auto insurance

CHICAGO – The American Property Casualty Insurance Association’s latest paper, "The New Normal? Auto Insurers Continue to Struggle with Inflation," demonstrates how auto insurance claims inflation continues to outpace the underlying consumer price index at a rate much faster than increases in premiums.

Some key points from the paper include:

• Increasing costs of litigation and medical expenses continue to impact auto insurance losses.
• Increasing injury claim severity is offsetting reduced frequency.
• There is a continuing rise in auto repair, car rental, and vehicle replacement costs.
• The increasing frequency of vehicle damage claims multiplies the repair cost inflation.

APCIA’s research shows the significant impact inflation is having on loss ratios, which climbed to its second highest level in more than 20 years, reaching 78.4 percent for the second quarter of 2022. Meanwhile there continues to be a deterioration in driving behaviors.

“The jump in loss ratios is a shock to some,” said Robert Passmore, department vice president, Personal Lines for APCIA. “Early in the pandemic auto loss costs briefly dipped due to a significant decline in miles driven, leading to fewer accidents and claims to be paid. However, that was short-lived and as stay-at-home orders were lifted and restrictions eased, miles driven quickly returned to pre-pandemic levels. Now, the U.S. Department of Transportation data indicate vehicle miles traveled (VMT) from 2022 (January-May) shows VMT is within 1 percent of the pre-pandemic VMT level for those same five months in 2019.”

With the highest inflation in 40 years, insurance claim costs have continued to rise faster than the underlying consumer price index, far outpacing increases in premiums. Additionally. the National Highway Traffic Safety Administration (NHTSA) projects that an estimated 42,915 people died in motor vehicle traffic crashes in 2021 or an increase of 10 percent from the 38,824 fatalities in 2020. “This is the highest number of fatalities since 2005, and the highest annual percentage increase in the Fatality Analysis Reporting System’s history,” said Passmore.

APCIA’s paper finds that increasing claim frequency multiplies inflation’s impact on auto insurance claims costs. “For auto insurers, the now increasing frequency of claims coupled with significantly higher auto repair and replacement costs has heavily impacted auto insurance costs. Since 2017, claim severity for vehicle damage, which includes property damage liability and collision coverages, increased nearly 41 percent as of the first quarter 2022.”

While many would expect auto loss costs to normalize as driving levels returned to more traditional levels, other trends have emerged pushing costs higher, leading some to ask if this is the new normal for auto lines of insurance.

“The jury is still out as to if this is the new normal for auto insurance, however, most indicators suggest elevated auto repair and replacement costs will stretch well into 2023 and potentially beyond,” said Passmore. “Medical inflation is also accelerating and while Insurers continue to monitor the situation closely, claims frequency and severity continue to rise impacting injury and vehicle costs. As a result, insurers may be forced to pass these costs along to policyholders.”

To address these trends, “Insurers are strongly encouraging drivers to minimize their risk by avoiding risky driving behaviors that may result in a loss. Insurers are also advocating for better infrastructure, including reliable supply chains for critical auto parts and safer roads, which should result in fewer accidents and lower claims costs that help keep insurance premiums affordable for consumers.”

The American Property Casualty Insurance Association (APCIA) is the primary national trade association for home, auto, and business insurers. APCIA promotes and protects the viability of private competition for the benefit of consumers and insurers, with a legacy dating back 150 years. APCIA members represent all sizes, structures, and regions—protecting families, communities, and businesses in the U.S. and across the globe.