COVID changed everything. From changing driving patterns, to supply chain issues, to inflation and rising gas prices, carriers are attempting to cope with frequency and severity trends. For companies to adapt to the quickly changing rate landscape and avoid adverse selection, carriers are continuing aggressive rate actions coupled now with increased pricing sophistication to address underlying segment-level performance.

What you need to know:

• S&P projects Personal Auto combined ratio of 106.7% in 2022[1]
• Progressive average filed rate for Auto peaked in Feb and March at 11.9% and 12.3% and is now starting to slow
• Industry expects direct written premium to grow 7.6% in 2022[2]
• Rate increases are being coupled with product model upgrades

The personal auto marketplace is dynamic and complex; leading carriers invest in data and analytics to evaluate rate adequacy, pricing models and underwriting risk. As an example, carriers were quick to respond at the beginning of the pandemic, lowering rates and providing one-time credits when driving trends slowed significantly. As COVID-19 restrictions lifted and driving trends reversed, carriers began to increase auto rates.

“We continue to feel the pressure of rising loss costs, which on average are up almost 18% from the first quarter last year. Loss costs, especially in our collision and property damage coverages and total loss payouts, continued to be impacted by used car prices, which increased about 35% for the first quarter 2022, compared to last year, as well as inflation.”
Source: Progressive Q1 Shareholders Report

“In Automobile, the second quarter combined ratio was 104.3% and the underlying combined ratio was 101.8%, an increase of about 10 points relative to the prior year quarter. The increase reflects elevated vehicle replacement and repair costs. To a lesser extent, the increase is also a result of a comparison to a prior year quarter that still reflected lower claim frequency related to the pandemic.”
Source: Travelers Q2 Shareholders Report

These rate changes were typically base rate changes to offset the rate decreases that were taken in 2020. Despite these rate actions, 2021 results showed carriers underperforming with a combined ratio of 101.5% across the industry, approximately 9pts of deterioration year over year.

As we move into 2022, the market continues to take additional rate, but we are seeing carriers move back into the traditional rate making cycle. Carriers are looking for additional segmentation opportunities and refinement of their pricing rather than base rate changes. Below is an example of how leading carriers are addressing:

Source: Progressive 4th Quarter 2021 Invest Event

Progressive is typically on the leading edge of market changes and in 2020 they acted quickly and took rates down 4.2%. In 2021 they worked to get that rate back utilizing strictly base rate changes. In Q1 and Q2 of 2022 they began to take additional segmentation across coverages and mixes of business.

“As for our personal auto product development, we continue to deploy our 8.7 model and it was in market in 28 states that represented almost 65% of our countrywide premium as of the end of the second quarter. This model continues to show improvement in the conversion of new business quotes to customers across many segments with multicar policies and prior insurance among the stronger performing profiles. In June, we launched our newest model 8.8 in Iowa and will be rolling it out to additional states throughout the remainder of the year as well as monitoring performance”

Source: Progressive Q2 Shareholders Report

In Ohio, Travelers filed several pricing enhancements with their latest filing labeling it a “refresh” of the current Auto product.  When carriers upgrade pricing, typically the spread in expected price change for customers increases as well.  Travelers, in their Ohio rate filing, provided the maximum and minimum rate change for customers of +77% and -13% respectively (SERFF TRVD-133175334).  This is a drastic change from a 2021 Ohio filing of +11% and -10% respectively (SERFF TRVD-132620632).

We have seen carriers follow a similar pattern as they file their rates for 2022. As inflation and driving behaviors continue to put pressure on both frequency and severity trends, it is important for carriers to have a good understanding of their performance by profile of business. This will allow companies to keep up with the quickly changing rate landscape and avoid adverse selection.

Looking to gain better understand of your books performance or add segmentation into your class plan? Contact MCA to learn more!

Footnotes:
1 – US Property & Casualty Insurance Market Report
2 – US Property & Casualty Insurance Market Report