While private auto insurance rates are rising in the U.S., questions remain about whether those hikes will be sufficient to offset rising severity and loss costs for carriers.
The consumer price index report for November showed pricing for motor vehicle insurance was higher by 13.4% year over year, up from 12.9% in October. However, auto maintenance and repair costs — an element of severity — recorded a more modest increase of 11.7%. The cost of parts and equipment climbed 11.6%.
Even with severity on the upswing, the stock prices of some of the largest publicly traded carriers in the personal auto space have managed to remain in positive territory this year. The Progressive Corp.'s stock price has risen almost 24% to $126.45 at the close of trading on Dec. 16 from $102.00 on Jan. 3. The Allstate Corp.'s share price was up to $131.19 from $118.27, a 10.92% improvement.
This positive performance is in marked contrast to the wider market. The S&P 500 Insurance index has risen 6.78% thus far in 2022, while the broader S&P 500 is down 19.68%.
The road ahead
Whether these insurers will continue to be resilient if inflationary pressures continue throughout next year is another matter.
Piper Sandler analyst Paul Newsome said while recent rate increases have been helpful, it is not clear to him or his investors that personal lines rates are rising quickly enough to overcome claims severity.
"There is a wide range of views about this among investors and that is because it is not clear by how much severity will increase in 2023 and beyond," Newsome said in an interview.
It will take time for premiums to earn in, Wells Fargo analyst Elyse Greenspan said in a note, and severity has not eased very much. Greenspan said auto insurance pricing is still only up 12.6% since November 2019 while maintenance and repair costs are up 21.4% in the same period.
Newsome said all of the insurers he follows say they are planning to increase personal lines prices to match or exceed claim inflation.
"If claim severity continues to be very high, I would expect personal lines prices will also continue to rise rapidly to offset that," Newsome said.
Premium hikes
Three of the largest auto insurers moved to boost auto rates in their approved third-quarter rate filings. GEICO Corp. was expecting an additional $1.57 billion in premiums from third-quarter increases, while State Farm Mutual Automobile Insurance Co. was approved for hikes that should bring in $1.31 billion. Allstate's third-quarter rate increases stand to bring in another $797.7 million, while Progressive's hikes look to add $471.3 million in premiums.
Allstate announced Dec. 15 that it had implemented auto rate increases of 10.2% across 13 locations in November. CFO Jess Marten in a press release said that, since the beginning of the year, rate increases in 2022 have generated $3.6 billion year to date.
The need for further rate hikes was magnified by the private auto insurance industry's direct incurred loss ratio sitting above 70% for the fifth straight quarter. The loss ratio for the business line jumped to 84.7% in the third quarter, the highest since S&P Global Market Intelligence began collecting quarterly regulatory data in the first quarter of 2001.