Strong rate hikes fueling nearly a 16 percent in direct written premiums for U.S. private passenger auto insurers will bring the industry combined ratio down from a “worst-in-decades” result for 2022, according to an analysis by S&P Global Market Intelligence.
But the improvement from a 112.2 combined ratio won’t be as much as the industry had hoped, S&P GMI said in a media statement announcing its newly released “U.S. Auto Insurance Market Report, which added that improvements aren’t coming as rapidly as expected.
Although the report does not indicate the expected combined ratio improvements, S&P GMI told Carrier Management that project the firm’s analysts project that U.S. private auto combined ratio will come down to about 108.7 for 2023 and to 102.9 for 2024
The report does provide direct premium growth forecasts of 15.9 percent for full-year 2023, and 9.1 percent for 2024. The 15.9 percent projection exceeds an 11.4 percent growth figure achieved across the industry for the first-half of 2023, a prior projection from S&P GMI of 13.4 percent—and surpasses the previous 25-year high rate of 10.2 percent in 2003.
“The post-pandemic return to normalcy has played out differently than most market participants envisioned,” said Tim Zawacki, Principal Insurance Analyst, S&P Global Market Intelligence. “Stubbornly elevated crash severity has defied the longer-term trend, reflecting secular changes in working patterns and other factors that have resulted in more wrecks occurring at higher rates of speed. Increases in severe crashes have precipitated a rise in litigated claims, which drive up costs. Severe weather and a surge in vehicle thefts have resulted in higher losses in the comprehensive coverage,” he said, summing up the environment that auto insurers are responding to with rate actions.
These factors have combined to push up the industry’s private passenger auto loss ratio by 23.9 points between 2020 and 2022, the report notes, also providing map-like graphics that illustrate how state-specific 2022 loss ratios compare to five-year averages, and relative changes in 2022 premium growth for individual states compared to the countrywide average.
Multiple pressures on auto loss costs include inflation in repair and replacement costs which remain elevated. Used car values have dropped from 2022 highs, and year-over-year rates of change in the U.S. Consumer Price Index’s motor vehicle maintenance and repair component peaked in January, the report notes. But the index remains in double-digits, and United Auto Workers strikes add another component of uncertainty to the outlook for used vehicles and auto parts.
The report also reviews changes in the motor vehicle insurance Consumer Price Index—a measure that S&P GMI analysts used to project future premium growth, combining hose observations with aggregate approved rate change data captured in various S&P GMI products to compile projections.
Beyond 2024, S&P expects written premium growth to fall back “rather rapidly” to long-term historical average growth rates in the mid-single-digits. By that time, “we anticipate that the predominance of six-month policy terms among most of the largest carriers will facility a catching up to loss costs,” the report says.