Higher auto loss costs are here to stay, according to the leader of Allstate, who also said that his company will be pushing up auto insurance prices higher, and at a faster pace, for the balance of the year.

Speaking at the Barclays Global Financial Services Conference on Tuesday, Allstate President and Chief Executive Officer Tom Wilson said that higher loss costs have become “embedded in the system.” He also imagined a way of embedding automatic price increases triggered by severe weather into personal lines insurance coverage.

Wilson gave his take on auto loss cost trends in response to a question from Barclays insurance analyst Tracy Dolin-Benguigui, who asked how Allstate’s playbook has changed since 2015, when loss cost trend was a “frequency story.”

Referring to severity factors like used car price jumps and inflation in repair parts and labor costs, Wilson said, “We don’t believe these loss costs are going down.” While used car prices are moderating and leveling out, “we’re not going back to where we were before because it gets embedded in the system.”

“People buy cars; they get loans on cars…Nobody wants the prices to go down by 40 percent to get back to where they were. That’s not going to happen.”

“So, you act differently. And we have taken larger, more rapid price increases,” he said, outlining the first of several strategies that Allstate has put in place to get its combined ratio—a 105 for the first half of 2022—back down to historical levels in the mid-90s.

During prepared remarks he made before Dolin-Benguigui and audience members posed questions to the executive, Wilson reported that Allstate’s combined ratios averaged 6.5 points better than industry over the 2017-2021 time period. Late last year, the company started taking rate actions, with rates for the Allstate brand jumping 10 percent since fourth-quarter 2021 and 7.1 percent in this year alone. (Related article: Rate Hikes, Telematics, Data Science Leading Allstate Back to Profit)

In addition to rate actions, he said Allstate is working to get back to profitability by implementing more restrictive underwriting actions on new business in locations and risk segments where the carrier cannot achieve adequate prices, offering California as an example. Allstate is also continuing actions to cut operating costs, which it began taking in 2018, with the goal of lowering an expense ratio measure of claims and underwriting expenses by 6.0 points by 2024. According to Wilson, the carrier is halfway there and also plans to reduce more costs—those related to advertising spending—for the remainder of 2022.

Finally, he said, “Claim practices have been modified to deal with a high inflation environment. That means getting there early, leveraging analytics, using scale [and] redesigning processes,” he said. “We have strategic partnerships with a bunch of parts suppliers where we buy, at discounts, [and with] repair facilities,” he said, explaining the benefits of scale. In addition, “we use predictive modeling to decide should we repair or replace this car” on collision claims, “and also to look at the likelihood of severe injury and attorney representation” on bodily injury claims, he said.

During the Q&A part of the fireside chat, Wilson suggested that attorneys are using their own predictive models as he discussed rising severity trends. “The plaintiff bar figured out how to use data and analytics and marketing to get more claimants,” he said, referring to a claims driver that compounds the impacts to more severe accidents and medical inflation. “We’re seeing more attorney representation,” he said, speculating that when people weren’t driving and getting into accidents during the pandemic, plaintiffs lawyers had to devise a way to get more cases. “Now they spend a billion dollars a year advertising,” he asserted.

“We’re having to change the way we handle bodily injury claims to counter the fact that the attorneys are taking on more cases,” he said.

Interestingly, on the pricing front, Wilson said drivers have been accepting rate increases without too much fuss, basing his assessment on a recent meeting he had with a group of agents. “I’m not saying they’re happy when we’re calling and saying ‘your rate’s up 15 percent.’ But they’re, like, ‘yeah, my house is worth more; my car’s worth more. Everything else is going up. Food’s up; gas is up.’ So, they’re not shocked,” he said, also reporting that Allstate’s customer retention levels are outperforming expectations given the size of its price increases.

During his prepared remarks, Wilson also reviewed Allstate’s track record in homeowners insurance, displaying a chart that showed Allstate’s combined ratios below competitors State Farm, Progressive, Travelers and the industry average in 2017-2022. One factor keeping Allstate profitable, he said, is a property inflation adjustment, which “increases the price we get for homeowners insurance as property values go up when it happens,” also reporting that homeowners average gross premiums are up 13.7 percent through June at Allstate as a result.

“Had we had that for used car prices in auto insurance, our prices would’ve gone up automatically,” he said later during the Q&A part of the session. “We didn’t. Nobody does. It’s sort of a one-time thing,” he said, contrasting the unexpected used car price jumps with continual growth in home values.

“So, we are looking at how do we build those automatic rate mechanisms into auto insurance, and what [else] we would do with home insurance. I’m more interested in home insurance because it’s a 12-month policy. It takes longer to get the money. [For] severe weather…, we’re looking for ways to build in a prospective increase in homeowner prices for trends in severe weather, just like they have trends in the value of the house. So we don’t get caught—’Oh geez, we just had a hurricane. We need to raise prices.'”

Wilson’s talk of automatic weather factors prompted Dolin-Benguigui to ask a technical question about whether regulators would view this innovation as a “non-rating variable.”

Replied Wilson: “It’s an insured value variable…In the regulatory scheme, that wouldn’t be considered a rating variable. That said, they would have something to say about it. They’re not…regulators have something to say about everything,” he suggested.

At one point during the session, Wilson did address questions about a place where regulators aren’t saying yay or nay to rate filings—the state of California. “They haven’t approved any…We’ve had a commercial filing in there for a couple of years. We thought we had a deal on homeowners, and apparently we no longer do. So, we’re in an environment where, I think, we are assuming that not much is going to change in the near term,” he said, predicting market instability resulting from underwriting actions by Allstate and other competitors in a state where nonrenewals are limited and rate filing approvals are not forthcoming.

“You can do things like down pay requirements. Right now we’re at 50 percent, and when you raise your down pay requirements, people buy less,” he said, offering an example.

“We’re looking at a whole range of things that are going to fix the profitability in that state. So, I think you can just expect us to get smaller in that state. And that’s 12 percent of our premiums in the auto business. But we’re completely comfortable with it if we don’t grow in California.”

“We can’t give our money away,” he reasoned.

Topics California Trends Auto Profit Loss Pricing Trends Homeowners