Auto Insurer Underwriting Results Take A Negative Turn, Fitch Reports

Following record performance in 2020 from pandemic-induced reductions in driving activity, U.S. personal auto insurance underwriting results deteriorated sharply in 2021, with more pronounced weakness emerging in the fourth quarter. Carriers are adjusting prices upward to offset the return to more normalized claims frequency and a persistent rise in loss severity. However, the magnitude of rate increases may be hindered by regulatory constraints and competitive forces, with inflation and supply chain issues continuing to boost incurred losses, Fitch Ratings says.

Personal auto performance in 2021 revealed a sharp deterioration from record 2020 results, according to information in supplemental GAAP filings for a group of ten publicly traded companies that represent approximately 44% of industry market share. The group’s personal auto combined ratio rose to 96.3%, a figure last exceeded in 2017 and a sharp departure from the highly profitable 88.0% ratio reported a year earlier. Earned premiums expanded by 8.6% in 2021 year over year (YoY), due in part to acquisition activity.

All of the companies reported weaker auto results in 2021 relative to a year earlier. Cincinnati Financial and Hartford Financial Services led peers with the lowest segment combined ratios at 91.2% and 92.9%, respectively. Aggregate results are heavily influenced by larger carriers, including GEICO, Progressive, and Allstate, each of which reported 6-9 percentage point increases in their 2021 auto combined ratios. Kemper was the only insurer in this group to report an underwriting loss for the year with a 113% auto combined ratio tied to deteriorating non-standard auto results and reported reserve deficiencies.

State Farm, the market leader, reported a $3.4 billion (8.2% of earned premiums) statutory underwriting loss in auto (before policyholder dividends), compared with a $3.5 billion gain (8.3%) in 2020. GEICO and Progressive, which rank second and third, respectively, could surpass State Farm in premium volumes in the next two years if current growth rates are sustained.

Heightened litigation activity in automobile claims are a driver of loss severity for the last several years. More recently, loss severity increases are influenced by more aggressive driving practices leading to serious accidents and rising physical damage costs influenced by tight labor markets and supply chain issues. GEICO, for example, reported auto bodily injury coverage severity rose by 8%-10% in 2021 and collision severity was up 15%-16%.

Larger carriers reported a 25%-30% decline in auto claims frequency in 2020. A return toward normal driving activity promoted a YoY rise in 2021 frequency. However, Allstate reported that gross physical damage claims frequency in 2021 remained nearly 20% lower relative to 2019. Progressive reported that 2021 auto claims frequency remained 7% below 2019 levels.

CPI data on motor vehicle insurance costs indicate unprecedented reductions in motor vehicle insurance costs during 2020, with a recovery throughout 2021 bringing costs roughly in line with pre-pandemic levels. We expect premium rates to rise significantly in 2022, which will promote stabilization in results. However, performance improvement could be muted by further volatility or rising claims frequency trends and limited change anticipated in severity patterns.