Statutory loss ratios alone likely fail to fully capture the extent of private auto insurers' COVID-19 response.
California Insurance Commissioner Ricardo Lara's call for certain large private auto carriers to provide "substantial" additional premium relief following a year of historically favorable underwriting profitability in the business line has reignited a long-running debate over the adequacy of the industry's response to unprecedented circumstances.
An S&P Global Market Intelligence analysis of 2020 California statutory private auto data shows that the three companies identified by Lara, CSAA Insurance Exchange and subsidiaries of The Allstate Corp. and Mercury General Corp., produced the lowest direct incurred loss ratios among the state's 10 largest individual private auto writers after adjusting those values to account for premium credits accounted for as policyholder dividends or underwriting expenses.
But our analysis also suggests that the amounts of the credits as disclosed by individual carriers in response to Lara's previous data calls do not fully explain year-over-year changes in earned premiums, which showed significant deviation from what we might have expected in a more normal environment. And fallout from certain of the carriers' responses may not be limited to financial results for calendar-year 2020.
Savings not built on credits alone
CSAA, Mercury Insurance Co. and Allstate Northbrook Indemnity Co. provided credits to California private auto customers during 2020 in the respective amounts of $69.8 million, $91.7 million and $170.2 million, based on their respective responses to the various California Department of Insurance data calls. The latter sum excludes another $20.4 million in credits that Allstate Northbrook provided for the first quarter of 2021. And all three of the values may underrepresent the effective amounts of the relief each carrier extended in various forms.
Mercury, for its part, said on Oct. 6 that it returned more than $175 million in premium to its California customers since the start of the pandemic. In addition to credits, the company also reported an effective decline in premiums from a significant number of customers opting to reduce their estimated mileage. The company also complied with a directive from the California regulator to extend payment deadlines by up to 60 days.
Allstate Northbrook, in a May communication with the department, referenced its verified mileage program as providing an opportunity for policyholders to have their actual experience reflected in their rating through the submission of odometer readings. In calculating its first-quarter 2021 credit of 3.5%, the company indicated that the significant impact of lower claims frequency had been offset to a large extent by increases in severity, the impact of the verified mileage program, additional bad debt expense and factors such as policy liberalizations, accidents involving policies in canceled status and late reported claims.
Comparing the carriers' reported 2020 direct premiums earned in the California private auto business to what might have been their expected results in a normal environment may offer a more holistic view of the impact on the top lines of their income statements.
The three carriers, on a combined basis, reported $6.01 billion in California private auto direct premiums earned in 2020. Using their individual 2019 rates of growth in direct premiums written as a proxy for normalized 2020 expansion in direct premiums earned, we would have expected their volume for the year to total nearly $6.56 billion. After incorporating their $331.7 million in aggregate 2020 premium credits, there remains a $214.5 million deficit between the amount of premiums the carriers might have earned and their as-reported results.
This exercise does not capture other items where pandemic-related fallout might have materialized, including incremental underwriting expenses related to payment leniency measures and the lack of reductions in commissions commensurate with the amount of credits extended. It also assumes that carriers' 2020 direct premiums earned as reported on the California state page of their annual statements were reduced in the aggregate by the same amount of the premium credits they disclosed in Lara's data calls. Perhaps most importantly, premium reductions related to lower mileage would be earned into carriers' books over time upon a policy's renewal. And, unlike the premium credits, their full impact would not be fully reflected in 2020 results.
CSAA offered a more expansive rationale for providing no additional refunds in a January communication to the California Department of Insurance, saying that "there is simply no underwriting profit to return to our policyholders" as it was hit by losses from significant California wildfire events for the third time in a four-year stretch. Further, the company said it was taking a long-term view as to the potential for pandemic-era claims to exhibit different development patterns relative to historical outcomes.
The "greatest gap"
All told, Lara said that insurers had provided credits and dividends of more than $2.4 billion to California drivers during the pandemic. S&P Global Market Intelligence calculates that the top 10 individual insurers in the California market provided $1.56 billion in special dividends and credits to their policyholders in the state in 2020 and 2021.
State Farm Mutual Automobile Insurance Co. and Interinsurance Exchange of the Automobile Club, the top two individual California private auto writers, combined to issue COVID-19-specific dividends totaling $880.1 million. This amount excludes the regular dividends that the Auto Club also extended to its policyholders throughout 2020 and into 2021, but includes the $396 million in dividends declared by State Farm in March 2021 that pertained to June through December 2020.
The top 10 individual California private auto insurers generated a direct incurred loss ratio of just over 53% in 2020 when reducing the denominator to incorporate special dividends, credits accounted for as an underwriting expense by The Progressive Corp.'s United Financial Casualty Co., and Allstate's first-quarter 2021 premium credits.
The California private auto loss ratios as calculated on that basis would have been 48.2% for CSAA, 48.5% for Mercury Insurance and 51.3% for Allstate Northbrook. State Farm's adjusted loss ratio was 52.5%, inclusive of the dividend it declared in March. The highest adjusted loss ratio among the top 10 individual entities was 58.8% for Kemper Corp.'s Alliance United Insurance Co.
Lara's announcement only made reference to CSAA, Mercury and Allstate, based on department data showing that they exhibited "the greatest gap between what they initially refunded drivers, and what they should have refunded." But it reiterated a conclusion previously reached by the department that "many insurance companies overcharged consumers for their private passenger automobile" insurance between March and September 2020.