Inflationary pressures and driving habits returning to pre-pandemic levels have aggravated underwriting losses for several private auto insurance technology companies.
Increasing claims costs through higher claims severity and frequency have plagued U.S. private auto insurers over the past two years. Those costs are likely to remain elevated for the remainder of 2022, but the rate of growth is expected to moderate during the second half of the year, Frank Palmer, Root Inc.'s chief insurance officer, said during the company's second-quarter earnings call. Root also reported that severity increased 6% while frequency was up 1%.
Triple digit combined ratios
Root's underwriting units have continually had the largest combined ratio over the last four quarters among three full-stack private auto insurtech companies, according to an S&P Global Market Intelligence analysis. The combined ratio — total net costs divided by total premiums — is used to measure an insurer's underwriting profitability. A ratio over 100% means the company is operating at an underwriting loss.
Root's combined ratio of 310.7% for the second-quarter of 2022 was up 43 percentage points from the prior three-month period.
As it looks to lower its operating losses, the insurer is seeking to boost rates and cut expenses. It eliminated 20% of its workforce in January and has slashed it sales and marketing expenses.
Metromile Insurance Co., now part of Lemonade Inc., recorded a combined ratio of 109.6% in the second quarter, the lowest among the insurtechs in the analysis, and outperformed a subset of the private auto industry during the period. The insurtech's combined ratio was roughly 4 percentage points better than an aggregate ratio of 195 individual insurance subsidiaries that primarily write private auto insurance.
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Increasing rates to boost profitability
Insurtechs have filed for rate hikes in states across their book of business, based on a review of approved public rate filings. In several of those states, regulators granted insurers multiple rounds of increases.
Root boosted its Texas private auto rates by 20.1% on Feb. 23 and then proceeded to hike them again by another 18.5% on July 26. Both dates are based on renewal business effective dates. The company collected the most direct premiums from the Lone Star State in the first six months of 2022, equivalent to roughly 13% of its direct premiums written in the period, Market Intelligence data shows.
Clearcover Insurance Co. also boosted rates in Texas; a 9.1% increase went into effect in February for renewal business. The insurer had multiple rounds of increases in three of five states where it generates the most premiums.
California, the state where Metromile sees the most premiums, is notably absent. The largest private auto premium state in the country has not approved a single rate increase in over two years.
Clearcover surpasses Metromile
For the third consecutive quarter, Clearcover's direct premiums written have surpassed Metromile's. The Illinois-based company continues to experience triple-digit year-over-year increases in its direct premiums, with $33.2 million of premiums coming in during the second quarter of 2022, compared to $15.9 million a year ago.
On the other hand, Root's tightening of underwriter requirements has impacted its premiums. The insurer's direct premiums written fell to $130.6 million in the second quarter from $176.7 million in the same period of 2021.
