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Higher claims severity, driving activity may create bumpy road for auto insurers

Higher U.S. private auto insurance claims severity could start to seriously weigh on business line results as loss frequency rebounds to pre-pandemic levels.

The industry recorded extraordinary results within the private auto line of business in 2020, as loss frequency dropped substantially due to shelter-in-place restrictions during the initial stages of the COVID-19 pandemic. With those restrictions essentially gone across the U.S., major insurers are reporting miles driven and claims frequency more in line with what they experienced prior to the pandemic.

The U.S. Department of Transportation’s Federal Highway Administration estimated that Americans drove a total of 813.5 billion miles in the second quarter of 2021, an increase of almost 30% when compared to the same time in 2020 and down only 4.2% versus the second quarter of 2019.

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The Progressive Corp. has indicated that vehicle miles traveled by its policyholders and claims frequency continue to be moving towards pre-pandemic levels. The insurer's claims frequency during the first six months of this year jumped 19% versus the year-ago period, and were down just 8% on an annualized basis from 2019.

Berkshire Hathaway Inc.'s GEICO also reported double-digit year-over-year increases in claims frequency across all coverage types when compared to the first six months of 2020.

While claims frequency dropped considerably for Progressive and GEICO during the pandemic, severity per claim did not experience a similar trend. Accident severity at both insurers has steadily increased for the past several years and accelerated in the first months of the pandemic.

Those higher severity levels can be attributed, in part, to inflationary pressures as well as more serious accidents. Severity within the bodily injury coverage has grown by at least double digits since the second quarter of 2020 for both companies.

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Information provided by the National Highway Traffic Safety Administration shows an increase in fatalities during motor vehicle accidents over past several quarters. The large year-over-year increases in fatalities started in the third quarter of 2020, with statistical projections showing a 13.6% increase in the period, followed by 13.1% increase during the last three months of 2020.

According to estimates 8,730 people died in traffic accidents in the first quarter of 2021, an increase of 10.5% from the prior-year period. Estimates for fatalities during the second quarter of 2021 have not been released.

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Higher medical care costs, rising new and used car prices, and larger bills for vehicle repair may keep severity rates high for some time.

The Allstate Corp., Liberty Mutual Holding Co. Inc. and Progressive all cited higher used car valuations among the factors contributing to the year-over-year increase in severity within their collision coverage. Higher used vehicle prices raises insurers' costs for total losses, though those can be partly offset by higher salvage values.

A review of the U.S. Labor Department consumer pricing data shows that used car and truck prices leveled off and actually declined slightly in August. That said, those prices were still up nearly 40% compared to December 2019. Over that same period, the prices for vehicle parts and equipment, and the cost of maintenance and repair, were up 6.3% and 7.0%, respectively.

If severity remains elevated and claims frequency further increases to the pre-pandemic levels, operating results may deteriorate further within the personal auto line of business for U.S. insurers. The industry reported a direct incurred loss ratio of 66.0% during the second quarter, the highest quarterly ratio since the fourth quarter of 2018, when the industry recorded a ratio of 66.9%.

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