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While publicity about personal auto insurer initiatives has focused chiefly on requested rate increases, there’s more to the picture regarding auto insurers’ efforts to improve underwriting results after two calendar years of record underwriting losses.

Improving the overall quality of insured policyholders has been a major focus as auto insurers have sought to address rate needs state by state while refining risk selection and underwriting standards. As a result, 2023 numbers, despite a sizable underwriting loss, show insurers taking a deep look at their risk selection, underwriting, pricing and claim disciplines to devise initiatives to reverse the negative trends, according to a new AM Best report, “.

Net underwriting income for the first half 2024 was $13 million compared to a loss of $457 million during the same period a year ago. The combined ratio for the period was 98.8 compared to 107.8 in 2023.

Efforts to achieve rate adequacy resulted in a 25% year-over-year increase in direct premiums written in the first quarter of 2024, and a 23% increase in the second quarter. First-quarter DPW grew to $7.2 billion as total DPW accelerated faster than it has historically, with a $1.5 billion increase from 2023 to 2024 after increasing no more than $1 billion per year since 2019, AM Best said.

The private passenger nonstandard auto (PPNSA) composite’s quarterly DPW surpassed the $7 billion plateau for the first time in the first quarter of 2024, and it came close to doing so again in the second quarter, with $6.6 billion in DPW. The composite’s premium increases reflect higher rates insurers are using to battle the industry’s rising loss costs.

Challenges Faced By Auto Insurers

Underwriting results for the private passenger auto insurance market have been volatile and decidedly unprofitable for the past three years, following record profitability in 2020 attributable to the COVID-19 pandemic, making 2021 and 2022 private passenger auto underwriting results the worst of the past decade for both standard and nonstandard insurers. The PPNSA composite’s net underwriting losses in 2021 and 2022 reflected higher claim expenses. As a result, relatively small net underwriting losses for the PPNSA composite in 2019 and 2020 expanded to shy of $1 billion for the first time in 2021 and 2022. However, the PPNSA composite’s net underwriting leverage has been relatively stable over the last few years, growing slowly from 3.1 in 2013 to a high of 4.4 in 2023.

The improvement in the composite’s 2023 combined ratio was tied directly to its loss and loss adjustment expense ratio, which was 2.6 percentage points lower in 2023 than in 2022 and doubled the 1.3-point decline in its other underwriting expense ratio. In 2023, the standard auto market recovered and experienced typical favorable reserve development.

However, there are still significant barriers that need to be overcome. Persistent rate inadequacy, inflationary pressures on physical damage claim costs and an increase in attorney-represented bodily injury claims still represent substantial headwinds. Other challenges include volatility of loss cost severity driven by higher fatality rates, increased repair costs for newer vehicles, higher used car prices, supply chain and labor market disruption, rising medical costs and the overall inflationary environment.

Financial Buffers Help Shield PPNSA Performance

According to AM Best, the challenges responsible for PPNSA’s performance decline in 2021 resulted in the key underwriting ratios between the PPNSA and private passenger standard auto (PPSA) composites widening significantly in that year, although the margin narrowed by the end of 2023.

While the combination of loss and underwriting expense ratios tends to be higher for the PPNSA market than for the PPSA market, the higher level of PPNSA insurers’ “other income” from the finance and service charges collected by PPNSA insurers partially offsets the higher underwriting expense load from a pretax operating income perspective.

The inherent complexities of insuring higher-risk policyholders have contributed to the PPNSA insurers’ underwriting results being worse than those of PPSA insurers. Nonstandard auto policyholders pay more in finance and service charges, resulting in a higher percentage of the PPNSA insurer total revenues coming from those sources compared to PPSA insurers.

Improved Results in 2023

The PPNSA composite’s net underwriting leverage has been relatively stable over the last few years, growing slowly from 3.1 in 2013 to a high of 4.4 in 2023. However, they still generated an underwriting loss for the year, albeit much smaller than the losses in 2021 and 2022. An increase in net premiums contributed to a $216 million decrease in the year’s net underwriting loss. After including growing net investment income and stable other income, the composite was able to generate a pretax operating gain for the year.

The improved underwriting results in 2023 continued through the first half of 2024, with a $450 million underwriting loss in the first half of 2023 becoming a small underwriting gain in 2024. The improvement reflects the impact of rate increases and the effectiveness of PPNSA company initiatives aimed at improving underwriting, pricing and claim handling,

Looking Ahead

AM Best recently revised its outlook for the US personal auto insurance segment from Negative to Stable. The key drivers of the outlook change were the segment’s improved rate adequacy, a more accommodating regulatory landscape for personal auto insurers, solid risk-adjusted capitalization, and rising investment yields as lower-yielding bonds mature and are reinvested at higher rates. The revision was further supported by improving segment results, with average direct loss ratios of the top 20 personal auto writers, which accounted for more than 85% of direct personal auto premium in 2023, improving through the first half of 2024 after peaking in 2022. The personal auto line also benefits from being a leader in leveraging current technology in all operational areas, including claims, underwriting and distribution.

Topics Profit Loss Auto