Inflation fuels some of Progressive's largest private auto rate hikes in years

The effects of rising consumer prices contributed to poor private-passenger auto underwriting results in the third quarter, and now they are behind a series of proposed double-digit rate hikes filed in multiple jurisdictions by The Progressive Corp.

The steepest year-over-year increase in the U.S. consumer price index in any month in 39 years during November triggered a change in monetary policy by the Federal Reserve. It may also reinforce the conviction among private auto insurers that higher costs to repair and replace motor vehicles will continue to push average claims costs higher, necessitating swift and significant rate actions.

The U.S. property and casualty industry's auto physical damage direct incurred loss ratio soared in the third quarter to just over 77.0%, well above the previous high-water mark in at least the past two decades.

Hurricane Ida undoubtedly contributed to the unfavorable third-quarter result. But the magnitude of recent rate increases proposed by the likes of Progressive, the No. 3 U.S. private auto insurer, and Berkshire Hathaway Inc.'s GEICO Corp., which holds a market-share ranking of No. 2, suggests a view in the industry that higher prices will not prove transient, even if the rates of increase retreat.

Based on documents obtained by S&P Global Market Intelligence between Dec. 1 and Dec. 17, Progressive Direct Insurance Co. filed for rate increases of 11.8% on a $28.7 million book of Tennessee business and 17.0% on an $11.9 million book of Washington, D.C., business. Progressive Casualty Insurance Co. filed for a 17.5% hike on a $4.8 million book of D.C. business. Each of Progressive Specialty Insurance Co. and Progressive Select Insurance Co. filed for 16.3% increases on Maryland books of business with combined annualized premiums of $243.9 million. Progressive Preferred Insurance Co. is seeking to raise rates by 10.4% on a $12.2 million book of Hawaii business. Mountain Laurel Assurance Co. joined Progressive Direct in filing for a significant Tennessee rate increase, in its case an 11.8% hike on a book with $107.6 million in annual premium volume. Two other Progressive underwriting companies are seeking 9.9% rate increases in the Volunteer State.

With the exception of the Hawaii filing, Progressive is seeking to implement the rate increases on renewal business in either January or February 2022, depending on the individual filing. It has proposed an effective date in May 2022 for the Hawaii action.

The Maryland and D.C. filings included similarly worded memorandums signed by Progressive product managers that explain how the combination of challenges in sourcing auto parts, rising injury and vehicle costs, and increasing accident frequency are negatively affecting the company's private auto business and necessitating the proposed rate actions. They note that Progressive provided more than $1.1 billion in premium credits and rate relief and reduced rates by more than $800 million countrywide on an annualized basis in response to COVID-19-related reductions in claims frequency.

"After this initial decline in miles driven, driving behavior has nearly returned to pre-pandemic levels — and so has the frequency of accidents," the Maryland and D.C. memorandums state. "As the number of claims returns to (and then surpasses) pre-pandemic expectations, insurers' costs follow. To pay the increasing claims, auto insurance rates must then also return to (and then surpass) where they were before the pandemic."

The Hawaii filing used different language to make the same points, stating that "we are seeing significant increases in our raw loss ratios, as well as a rapid return towards pre-pandemic frequency and persistently increased severity trends related to the various COVID impacts on costs."

Regarding inflation, the Maryland and D.C. memorandums noted that the Manheim Used Vehicle Value Index had surged by more than 40% on a year-over-year basis as of mid-November. According to the U.S. Bureau of Labor Statistics, the consumer price index pertaining to used cars and trucks rose by 31.4% year over year and by a seasonally adjusted month-over-month rate of 2.5% in November. The index pertaining to motor vehicle bodywork was up by 8.0% from November 2020 and 1.0% on a seasonally adjusted basis from October 2021.

Progressive's year-to-date personal vehicle combined ratio through November remained below management's 96% target at 95.4%. However, November marked the first month since May the combined ratios of Progressive's direct and agency personal auto businesses did not exceed 96%. The direct and agency combined ratios in November of 93.2% and 94.4%, respectively, marked increases from results in the high-80% range in the prior-year month.

President and CEO Tricia Griffith said during a November conference call that Progressive would "do what's needed," including raising rates, to achieve the 96% target across its businesses.

Prior to the recent round of actions, March 2017 was the last time Market Intelligence obtained a Progressive filing for a double-digit rate increase on private-passenger auto business, excluding motorcycle and recreational vehicle policies. The company and many of its peers raised private auto rates significantly between 2015 and 2017 in response to adverse frequency and severity trends.

It once again has company in its most recent round of actions.

State Farm Mutual Automobile Insurance Co., the No. 1 U.S. private auto writer, filed along with State Farm Fire & Casualty Co. on Dec. 16 in Maryland to eliminate the temporary COVID-19 premium adjustment factor on the independent private auto program in that state. The elimination of the factor would have the effect of raising rates by 4.4% on the top-tier mutual's $821.1 million book of Maryland private auto business. The overall rate impact on a $62.8 million State Farm Fire book would be 10.4%.

The group implemented factors of varying amounts in the summer of 2020 as a way of providing rate relief to its customers and has since tweaked them in a number of instances to respond to evolving trends. In Maryland, for example, the companies raised the premium adjustment factor to 0.88 from 0.85 previously in a filing that took effect for renewing business in May 2021. The elimination of the factors would occur for new and renewing business beginning March 1, 2022.