With auto losses becoming more frequent and severe in recent years, including higher costs for repairs and medical costs paid by insurance companies, S&P Global Ratings believes private auto insurers will continue to raise prices and lower expenses going forward to bolster profitability. Since top private auto insurers are generally highly diversified (by state and/or product line) and well-capitalized, we see limited rating pressure over the next 12-24 months, even if private auto underwriting profitability does not meaningfully improve (although our base case is that it will).

The Path To Profitability

We believe private auto underwriting profits will improve in 2024 and likely turn profitable in 2025, notwithstanding roadblocks from rising medical costs, dangerous driving habits, higher repair costs, and challenging state regulations. We expect private auto insurers will benefit from rate increases filed from third-quarter 2021 to year-end 2023 (about 12%-14% cumulatively), which would start to fully reflect in earned premium in 2024 and 2025 (see Appendix for historical data on our top 10 private auto insurers).

While the timing to achieve underwriting profit will vary by insurer, we believe auto writers will increase their pricing and risk segmentation while remaining vigilant of risk factors--such as distracted driving--to mitigate runaway losses. Over the years, we've observed insurers limiting underpriced policies and reducing expenses (such as advertising) to improve bottom-line results. In 2023, the industry's fixed cost (as measured by total underwriting expense net of commission and brokerage) to net premium written declined to 14.2%, from 17.2% in 2014.

On The Road Again

We think the level of vehicle miles traveled on American roadways will not abate given S&P Global Ratings Economics anticipates a relatively strong U.S. economy ("Economic Outlook U.S. Q2 2024: Heading For An Encore," published March 26, 2024). According to the Federal Highway Administration, Americans drove more in 2023, ending the year with 3.26 trillion vehicle miles traveled, up from 3.20 trillion in 2022, and 3.14 trillion in 2021 on all roads and streets in the nation.

With higher average traffic congestion and likely more cars and trucks on the road, National Highway Traffic Safety Administration (NHTSA) data showed the number of vehicles involved in fatal crashes has risen by nearly 13% since 2019. While the vast majority of accidents do not generally result in death, the sheer number of vehicle accidents in 2023 that occurred on American roadways is concerning.

What's Driving Insured Auto Losses?

According to the National Assn. of Insurance Commissioners, U.S. private auto industry underwriting losses were $15.8 billion in 2023, which translates to a combined ratio of 104.9% (over 100% indicates underwriting losses), marking three consecutive years of underwriting losses (see chart 1).

Chart 1

Since the U.S. lifted pandemic restrictions in 2021, fatal road accidents have returned to historical levels after more than a decade (2007-2019) of decline (see chart 2). According to the NHTSA, there were 1.11 fatalities per 100 million vehicle miles traveled in 2019, down from 1.36 in 2007, which rose to 1.34 in 2020 and has remained elevated since.

Chart 2

The rise in auto losses owes to increased dangerous driving behaviors--such as speed, alcohol impairment, distraction, decreased seatbelt use, and tailgating--and poor road conditions. In addition, higher costs on used cars and automotive parts/accessories/tires amplified insured losses between 2020-2023. Moreover, higher medical costs have also dented auto insurer profitability, and PwC expects medical costs to rise by 7% in 2024, up from 6% in 2023, and 5.5% in 2022. Compounding these factors, we think different state regulatory rating systems affect how easily insurers can increase rates to cover losses.

A Bumpy Ride To Profitability

In the U.S., auto insurance is regulated at the state level and every state's regulation system is unique. For simplicity, the Consumer Federation of America classifies rating systems into six categories from the more stringent "prior approval" approach to rates (such as in California) to the deregulation of rates (Wyoming).

Chart 3

While U.S. private auto direct premium written expanded at a compound annual growth rate of 5.3% to $318.4 billion in 2023 (up from $199.7 billion in 2014), private auto underwriting profits contracted. Based on our analysis at the state level the average direct simple combined ratio (DSCR) for private auto deteriorated by nearly 11 percentage points in the last five years (2019-2023) compared to the prior five years (2014-2018), which coincides with the increased number of fatal crashes and accidents, elevated loss cost inflation, and lagging rate increases.

We use DSCR primarily for state level comparability, excluding policyholder dividend ratios and other miscellaneous expenses due to statutory data limitations.

Chart 4

Our data analysis also indicates auto writers generally outperform in states with less restrictive rate regulation systems, and these states generally experienced strong underwriting recovery in 2023. While underwriting performance modestly deteriorated for nine states in 2023, the rest experienced an underwriting improvement of nearly 6 points in their DSCR (see chart 5). Five of the nine states that had lower underwriting performance in 2023 required regulatory approval for rate changes: Nevada, California, Washington, New Jersey, and Hawaii.

Chart 5

Appendix

Table 1