Personal auto insurance premiums are back to where they were before the pandemic, but there are signs that they will keep going up.

Auto insurers gave back around $14 billion to policyholders at the onset of the epidemic in the form of cash refunds and account credits, anticipating fewer accidents due to the economic lockdown.

However, while miles travelled decreased and accident frequency initially decreased, the frequency and severity of accidents subsequently increased. After decades of steady declines, traffic fatalities have also surged.

While personal auto loss ratios declined drastically in 2020, they have progressively risen since then to surpass pre-pandemic levels. This losing trend is projected to continue as more drivers hit the road and replacement parts prices rise.

Auto premium prices are influenced by a variety of factors that influence an insurer’s loss history. In a perfect world, rate changes would completely match with changes in loss experience.

As shown in the graph below, until the pandemic, these two industry KPIs correlated quite closely. Both prices and losses were affected by the disruptions of 2020, but losses were more unpredictable than prices.
Almost unprofitable

In order to stay afloat, insurers must establish premiums that are proportional to the risks they cover. The “combined ratio,” which is computed by dividing the sum of claim-related losses and all expenses by the earned premium, is used to assess insurers’ underwriting profitability. A combined ratio of less than 100% indicates a profit. A loss is indicated by a ratio greater than 100%.

Personal vehicle insurance has been a marginally profitable line for the industry for years, as the graph above demonstrates.

If recent trends in the number of accidents and the cost of replacing things keep up, premium rates are sure to go up even more.

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