U.S. Auto Insurers Struggle Amid Rising Claims, Costs

Loss ratios and claims severity soared in the first half of 2023, surpassing 2022's already high benchmarks.

Auto insurers who have invested in technology to enhance underwriting and pricing generally outperformed others in the segment.

The U.S. personal auto insurance sector has experienced a decline, with loss ratios intensifying in the first half of 2023, building on the already challenging year of 2022. According to AM Best's recent report, the direct incurred loss ratio in this period exceeded the previous year's figures by more than three percentage points, continuing an ongoing trend of deterioration in the auto insurance market.

The Best’s Market Segment Report, “U.S. Personal Auto Results Worsen as Claims Severity Rises,” indicated a 112.2 net combined ratio for the personal auto line of business in 2022, nearly 11 percentage points worse than in 2021. This figure not only represents a significant decline from the previous year but also stands approximately 10 percentage points higher than the 10-year average and median combined ratios for the line.

Contributing to this decline are various factors, including economic inflation, supply chain disruptions and technological advances in vehicles, all of which have driven up claims costs. Additionally, increased accident frequency has exacerbated the situation, leading to loss costs rising more rapidly than rates, thereby posing rate adequacy challenges for insurers.

Christopher Graham, a senior industry analyst at AM Best, notes that post-pandemic changes in workplace patterns, such as work-from-home arrangements, have not reduced vehicular risks as expected. “However, driver inattentiveness and riskier driving habits have become more problematic in the last few years, and as a result, auto severity has worsened,” said Graham.

The report revealed that in 2022, personal auto loss severity contributed to a significant 13-percentage point jump in the net loss and loss adjustment expense (LAE) ratio for the private passenger auto line. The average cost per private passenger auto claim surged by 16% in 2022, crossing the $10,000 per claim threshold. Despite a 12.9% year-over-year increase in direct premiums written, the direct loss ratio deteriorated in the first half of 2023 as insurers attempted to mitigate loss frequency and severity trends.

“AM Best-rated carriers are reassessing their personal auto portfolios and taking steps to address selection and price adequacy concerns," said David Blades, associate director of industry research and analytics at AM Best. "However, the time-consuming regulatory process for rate increases, which varies by jurisdiction, has made it difficult for insurers to stay ahead of deteriorating severity trends and address rate needs in real time."

The report also acknowledged auto insurers who had previously invested significantly in technology to enhance underwriting and pricing generally outperformed others in the segment. These insurers have also improved claims handling and expense management through technology-driven data analytics. AM Best anticipates a continued acceleration in technology adoption within the sector.

For more detailed insights, the full market segment report is available at AM Best's website.

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