What’s going on with US car insurance?

Let’s say you’re a first-time car purchaser this month, preparing to move outside of a major US city*.

Your used car isn’t as cheap as it would’ve been six months ago, but it’s fine. You’re making an uncomfortably large down payment because interest rates are high. Before you drive away, you just need to sort out insurance.

Normally this is an afterthought. But not this year.

In fact, your car might have to sit on the lot for a day or two while you shop around for a policy that’s not exorbitantly priced. You’re not uniquely uninsurable, but US auto insurers have been losing money on underwriting policies, and prices are going up fast.

Shares of companies with large auto-insurance businesses — ones that trade without the protection of Warren Buffett’s imprimatur, at least — have started to reflect those issues. Take Allstate and Progressive:

It isn’t total market mayhem, but it isn’t exactly copacetic, either. Auto-insurance losses were part of the reason Fitch Ratings downgraded Allstate’s credit to BBB from A- this week, as auto-policy underwriting is the insurer’s biggest line of business by premiums collected. Allstate also sold $600mn in preferred shares earlier this month with a 7.375-per-cent yield, a relatively wide spread to Treasuries. That suggests management is “comfortable at [a] lower rating”, BMO analysts wrote after the sale.

Progressive is holding up better, analysts at CreditSights say. But they are still downbeat on the entire industry. “After enjoying outsized profitability towards the start of the pandemic conditions with a substantial decline in miles driven, inflationary pressures have been particularly acute,” they wrote. 

The pressures on auto-insurance profitability have been caused mostly by unexpected “severity” rather than “frequency”. That means insurers aren’t paying out on policies more often, but they are paying higher amounts.

To put it simply: It’s not because more car accidents are happening, but the insurers’ average cost of car accidents (both those that are already paid and those that they expect to pay) are higher.

Here’s what Tricia Griffith, the chief executive officer of Progressive, told investors and analysts in the company’s first-quarter earnings call. With our emphasis:

We saw higher-than-expected severity trends in previously closed claims in personal auto primarily in fixing vehicle coverages. While I won’t speculate on why these trends changed, I can tell you that we reacted quickly and decisively to adjust our reserves for these short-tailed coverages. I’m confident in the people and processes we have in place to ensure we’re adequately reserved . . . 

Now, there’s a lot that goes into the severity of fixing cars. And so a couple of things. We have really — and I think as an industry, struggled with shop capacity. So our ability to get cars in and the throughput to get them out, which of course have an effect on length of time, rental, et cetera. Parts prices are up just a little bit under 3%, and labour rates, so think of the unemployment rate and how there’s a problem kind of hiring everywhere. Same thing with mechanical techs in the body shops. But those repair rates are up between 4.5% and 5%. So that’s some contributions.

Rising auto prices and high demand have indeed played a large part in the long-term trend of higher auto-insurance costs.

The Manheim Used-Vehicle Index shows used-car prices were 8 per cent higher in 2022, on average, than they were the year before, though prices have more or less stabilised since December. Not only are replacements for totalled vehicles pricier, repairs are more expensive as well, as the cost of car parts and services rose last year as well, according to BLS data.

There may be more to it than supply-chain problems and labour costs, however.

Progressive’s biggest first-quarter increases in severity came in the “bodily injury” and “property damage” categories, according to its 10-Q. Both of those categories appear to be for accidents where the covered driver is found to be at fault:

Allstate’s Mario Rizzo said in the company’s 1Q earnings call that stabilisation of auto prices was more than offset by a higher share of cars that were totalled in wrecks. He said that severity was estimated to be 9 to 11 per cent higher in the first quarter than full-year 2022:

Actually, used car prices or total values for used cars actually came down a little bit in the first quarter in our numbers, but we had a higher percentage of total loss frequency which impacted the mix, so those are really the drivers. And on bodily injury, it’s the same things we’ve been talking about, medical inflation, medical consumption, attorney representation.

So I think the drivers of severity continue to persist. In terms of where they’re going forward, it’s really anybody’s guess, but I think our perspective is, and we’ve been pretty consistent on this point, we’re going to continue to take prices up. We’ve been doing that really since the fourth quarter of 2021 throughout last year.

The insurer also had to reestimate its reserves (the amount it expects to pay for claims) in the fourth quarter of 2022 to reflect the following, among a few other things:

Increases in injury coverages reflect recent data and updated assumptions related to severity of third-party bodily injury claims, increased claims with attorney representation, litigation costs, increased medical treatment utilisation and higher medical inflation.

So victims of car wrecks and their lawyers are getting more aggressive (can’t imagine why), and they possibly even made a big push in the first quarter (puzzling). Or wrecks are getting rarer but worse for no discernible reason.

Whatever the cause, executives at both Allstate and Progressive have talked at length about raising prices. Allstate touted a 22-per-cent drop in new-issued applications in its 1Q presentation, with especially steep declines in three states where it has faced challenges to raising rates.

Still, the metric used to evaluate profitability of auto underwriters, the “combined ratio”, shows that Allstate continued to lose money on its auto underwriting in the first quarter, while Progressive just barely eked out a profit.

In other words, this doesn’t look like a “greedflation” story for the auto insurers just yet.

*This hypothetical may or may not have anything to do with recent events in this correspondent’s life.