Various GEICO Corp. companies have filed for double-digit increases in private-passenger auto rates in at least four states, in each case seeking to exclude highly unusual results from the 2020 accident year in projecting claims trends.
The approach has prompted questions from at least one state regulator, which GEICO has addressed by arguing that its experience during a time COVID-19 restrictions led to sharp declines in driving is unlikely to be repeated.
Any questions regarding a return to normalcy in the private auto business seemed to be put to rest by second-quarter statutory data, which showed a U.S. P&C industry private-passenger auto liability direct incurred loss ratio of 65.3% as compared with results of 55.7% for the trailing-12-month period ended March 31 and 56.8% for calendar year 2020. Rather than a return toward normal results in the business, the private auto direct incurred loss ratio surged beyond pre-pandemic levels amid higher levels of miles driven and the effects of inflation on claims severity.
Deterioration of that magnitude is likely to prompt an acceleration in the volume of filings that propose private auto rate increases in the coming months. But with various carriers employing different approaches to selecting historical trends for the development of their actuarial indications of rate need, which in a number of cases attempt to look past or downplay 2020's historically favorable results, scrutiny from regulators and consumer advocates may build.
A "prospective exercise"
GEICO companies filed for double-digit private auto rate increases with effectiveness dates for renewals beginning in November during the past three weeks in at least four states: Nebraska (a 13.3% overall increase across three companies); Nevada (increases of 10% or more in the group's three largest private auto underwriting companies in the state), Texas (a combined personal auto and recreational vehicle rate increase of 11.9% across four companies); and Virginia (overall rate increases in excess of 13% for five of the six entities included in the filing), according to data compiled Sept. 8 by S&P Global Market Intelligence. The most impactful of the individual company filings as measured by the implied impact on annualized written premiums is the 11.9% Texas rate increase filed by GEICO County Mutual Insurance Co.
The Nebraska, Nevada and Virginia filings, which indicated that the GEICO companies had developed experience indications using two years of data through Dec. 31, 2019, included versions of the following explanation: "As vaccination rates continue to rise, we expect frequencies to recover to pre-COVID levels during the period when these rates will be in use. As such, our indications and assumptions are based on pre-COVID data to remove the distortions of the 2020 accident year."
When asked about the selection of accident years by Texas regulators, the company expanded upon its rationale in a Sept. 7 submission by stating that pricing insurance is "a prospective exercise" utilizing historic data to project future loss experience. They noted, however, that the methodology is contingent upon an assumption that past experience will be reflective of future results. It characterized 2020 loss experience as "not a good predictive indicator of expectations moving forward. Under the unusual circumstances, the GEICO companies characterized accident-year 2019 data as the "most reliable" for the purpose of developing rate indications as opposed to "the heavily distorted 2020 accident year," based on a lifting of pandemic-related restrictions and the resumption of more normal activities.
"The unprecedented nature of the COVID-19 pandemic will continue to create challenges in methodology when relying on past data to predict future results, and may require deviations from what is considered standard practice," the GEICO companies said. "Relying on the distorted 2020 data would not produce actuarily valid projections."
Another auto insurer, Elephant Insurance Co., cited similar reasons in excluding experience from the second quarter of 2020 through the second quarter of 2021 in its Sept. 3 filing for a 0.2% rate increase on a $70.8 million Texas program.
Other approaches
Rather than exclude results from the 2020 accident year at all in the development of historical trends, some other private auto insurers have opted to assign relatively low weightings for all or portions of that period.
Several subsidiaries of Liberty Mutual Holding Co. Inc. have applied this strategy, which according to Safeco Insurance Co. of America in an Arizona filing "acknowledges the potential for pandemic impacts to persist but not be over weighted, as the COVID-19 experience is not fully predictive of losses in the proposed effective period."
Safeco intends to implement an overall rate increase of 9.9% on a $134.9 million book of business, effective in December. It assigned weights of 40% to 2018 and 2019 with the remaining 20% assigned to 2020 in evaluating experience for the liability and physical damage coverages.
Liberty County Mutual Insurance Co. uses the same methodology in support of its proposed 3.9% rate increase on a $437.7 million book of Texas private auto business. Responding to an by the state insurance regulator that "many" of the company's loss trend selections were unsupported by the experience provided, Liberty County Mutual argued that COVID-19 would have "minimal impact" during the two-year accident period ending Oct. 18, 2023, during which losses would occur under the filing.
"We have already seen Vehicle Miles Travelled in Texas return to normal as society has opened back up" the company said. "Businesses and schools are opening up (or have opened already) and we do not foresee these closures occurring again."
In several other cases, carriers made pandemic-related adjustments in filings for modest rate decreases.
A Connecticut filing by the Standard Fire Insurance Co. assigns weights of 45% and/or 46% to experience for the accident years ended March 31, 2019, and 2020, and only 9% to the accident year ended March 31, 2021, for most major coverages. That filing calls for an overall rate decline of 0.1% relative to an actuarial indication of a positive 13.8%.
Farmers Insurance Exchange, meanwhile, is excluding the point for the second quarter of 2020 in its consideration of historical frequency and severity trends, calling it an "extreme outlier." In calculating rate level indications in support of a 4.9% Michigan rate decrease to take effect at the start of 2022, the company assigned weights of 10.38% for the major coverages to results for the second quarter of 2018 through the first quarter of 2020, then 4.25% for the subsequent four quarters.
"While we believe that 2020Q2 through 2021Q1 were unprecedented," Farmers said, "we still acknowledge the improved experience of our overall book and reflect its mitigated impact in our results."
The Consumer Federation of America has criticized auto insurers for extending in 2020 what it characterized as "woefully inadequate" premium relief, and it has repeatedly called on state insurance regulators to take corrective action.