Automobile insurers are responding to a prolonged rise in the bodily injury portion of claims by increasing prices to keep pace with loss costs, with several publicly traded insurance companies noting the trend.
"We have seen over the past few years moderately rising claims severity for bodily injury claims, which has mainly been attributed to medical cost inflation," said Charles Huber, an A.M. Best Co. managing senior financial analyst in the property/casualty ratings division. A weak economy may also be contributing to higher liability claims because there is potential for more fraud, Huber said.
Insurers overall have recognized the trend and have responded by increasing rates, which have kept earnings stable in the private passenger auto liability line in recent years, Huber said. The cost per claim may have two components: bodily injury, which is the liability portion and includes items like medical bills; and physical damage, which includes the cost of auto repairs.
"When we look at the results, although claims severity has been trending upward, we see loss ratios on the auto liability line being fairly stable," Huber said. "As a matter of fact, the loss ratio through nine months is about a point better for 2012 than it was in 2011."
The industry has also seen rising auto repair costs in recent years, which would impact the physical damage portion of the auto cover, Huber said. Physical damage claims have also gone up due to severe weather and damage from hail and flooding.
"We may see an increase in the physical damage loss ratios in the fourth quarter of 2012 because of Hurricane Sandy losses," Huber said. Through the first nine months of the year ... the auto physical damage loss ratio has been down for the industry. "That's pre-Sandy numbers, so just how much impact Sandy might have on industry numbers for the year we won't know until we compile annual statements."
The insurance industry in 2011 wrote direct private passenger auto liability premiums of $102 billion, which is a 6.7% increase from the 2007 figure, according to BestLink, A.M. Best Co.'s online financial system. The industry in 2011 wrote direct private passenger auto physical damage premiums of $64.6 billion, a 2.6% decrease from the 2007 figure.
Mercury General saw its bodily injury severity increase in 2012, Gabriel Tirador, the company's president and chief executive officer, said in a recent conference call. The company raised auto rates in its home state of California by 4% in the fourth quarter, but he doesn't think that will be enough to reach the company's profitability target this year.
"We believe the increase in severity we are seeing is in part due to more severe accidents," Tirador said. "Overall, we have experienced an increase in medical bills and medical procedures such as epidural injections."
Brian MacLean, president and chief operating officer of Travelers Cos., said during a recent earnings call that severity, particularly the bodily injury component, has been trending upward for the company. MacLean said the rise has several parts, including expected general inflation and simply more severe accidents. He said the physical damage portion of severity was elevated in the first half of 2012, but returned in the second half of the year to near-normal levels.
Nationwide has seen severity pick up in the past few years, leaving the company reacting from an underwriting and pricing standpoint, Nationwide Chief Financial Officer Mark Thresher told Best's News Service.
"We can speculate on a lot of things," Thresher said. "People talk about older cars and a variety of things, but we're taking a look at where it has happened and why and making sure we understand it from an underwriting standpoint."
Travelers data on the industry show severity has been creeping upward in the past decade, showing average losses per claim for the industry in 2002 were about $2,500, whereas the figure was about $3,000 by the third quarter of 2012. As severity has risen, frequency had been trending downward until a few years ago when it bottomed out. MacLean attributed the frequency reduction to societal changes in vehicle safety and young drivers, which had been offsetting the severity trends.
"So, auto has been ... a place where, quite frankly, we are disappointed with the returns that we're generating," MacLean said during a recent presentation. "And we need to do better. And in the near-term, pricing needs to be a significant component of that."
MacLean said the company is responding to the severity uptick with rate increases, with renewal premium change at 9% in the fourth quarter. The company's auto retention is at 81%, but new business levels have been impacted by rate increases. It's not just private passenger auto MacLean said commercial auto has also been severity driven recently from the bodily-injury side.
State Auto Financial Corp. is also dealing with elevated levels of bodily injury severity in personal auto, as well as commercial auto, said President, Chairman and Chief Executive Officer Bob Restrepo. The company in 2012 increased personal auto prices 4.3%, but that did not exceed loss cost trends, he said.
The top five writers of private passenger auto in 2011 were State Farm Group, with market share of 18.07%; Allstate Insurance Group, with 10.48%; Berkshire Hathaway Insurance Group, with 9.22%; Progressive Insurance Group, with 8.06%; and Farmers Insurance Group, with 5.99%, according to BestLink.