Operating in uncharted territory, private auto insurers are striking a balance between providing premium relief to policyholders and still having the flexibility to react to future developments in an unpredictable time.
Each of the top 14 writers of private auto business in 2019 has announced plans to address a near-term reduction in claims frequency owing to "stay-at-home" orders implemented as a result of the COVID-19 pandemic. All but one of them have opted for some form of policyholder credits or payments to reflect observations of dramatically altered driving patterns, even as they keep their existing rating plans intact. The lone outlier, the group led by Erie Insurance Exchange, intends to reduce rates by $200 million in the aggregate for personal and commercial auto customers
"Our March data is thin and subject to a lot of uncertainty and only partially reflects the impact due to the pandemic," Cincinnati Financial Corp.'s Cincinnati Insurance Co. told state regulators in a series of recent filings that discuss their intent to following competitors' actions and refund insureds 15% of their March and April premiums through a one-time per-policy credit. "Although we will not know the true impact of these events until later, we want to respond now to provide immediate relief to our insureds."
The assumptions employed by American Family Mutual Insurance Co. S.I. to develop its $50 per-insured vehicle policyholder payment provide a sense of the potential scope of potential improvements in loss trends. American Family told the Ohio Department of Insurance in a recent filing that it is assuming a 35% reduction in loss costs for the next three months based on factors such as data generated by Unacast.com and customers' use of telematic devices. Through March 21, according to documents filed with Arizona regulators, American Family's KnowYourDrive app recorded a 40% decline in daily miles driven since the start of the pandemic.
Berkshire Hathaway Inc.'s GEICO Corp., for its part, intends to apply a 15% credit upon the next renewal for its private auto customers. The company told Ohio regulators that 15% represents a value "that would likely average out over the six months to a number that will put loss ratios closer to expected without endangering the solvency of the company."
The duration of the recent trend represents a key variable to the outlook.
"Short-term, the frequencies have dropped dramatically," GEICO said in its filing, "but this is not expected to last for the duration of this credit."
If one were to apply American Family's 35% figure to a hypothetical monthly pace of P&C industry private auto net incurred losses with no offset from relief actions, it would suggest improvement of nearly 1.9 percentage points per month in the loss ratio. The underlying incurred losses reflect an aggregation of results for the more than 700 individual P&C entities for which Insurance Expense Exhibit data was available on April 13. Those companies produced a net loss ratio of nearly 64.7% and a combined ratio of 98.7% in the private auto business in 2019.
The dramatic downturn in miles driven provides support to the idea that claims frequency will fall in a material way, but auto insurers take other considerations into account in their analysis of the situation.
A group of Liberty Mutual Holding Co. Inc. subsidiaries, including LM General Insurance Co., for example, cautioned in recent communications with regulators about the potential for loss severities to rise even as frequencies fall.
"With fewer cars on the road, faster driving is likely to take place," they said. "As medical and emergency services are more limited than in recent history, resulting injuries may be more difficult and costly to treat. There may also be changes in the costs of vehicle repair, with both parts and labor inaccessibility."
The emergence of more experience and greater visibility regarding the potential relaxation or lifting of "stay-at-home" orders should aid companies in the preparation of their next round of rate filings. While it is conceivable that private auto insurers may broadly consider lowering rates to the extent miles driven remain depressed, the nature of many of the recent filings as temporary policy form endorsements or new rules gives them the flexibility to make the necessary changes once more experience emerges.
Companies also seem to possess flexibility in accounting for relief payments.
Allstate Corp., the Cincinnati companies, and the P&C units of MetLife Inc. are among those who have indicated in regulatory filings that they intend to treat their respective credits as expenses. State Farm Mutual Automobile Insurance Co. has described its credit as a policyholder dividend.
An exhibit to American Family's Arizona filing indicates that the company requested permission from the Wisconsin Office of the Commissioner of Insurance to treat its relief payments as reductions to written and earned premiums under sections of Statement of Statutory Accounting Principles No. 53 that deal with earned but unbilled and/or uncollected premium.