I’ve got bad news for those needing to insure a car in the coming months: You should expect to pay more because your insurer is probably losing money.
Inflation has dramatically pushed up the cost of accident and theft claims, sticking insurers on both sides of the Atlantic with big underwriting losses–in other words, the premiums they collect aren’t sufficient to cover payouts and other expenses.
The U.S.’ largest car insurer, State Farm Mutual Automobile Insurance, reported a $13.4 billion (!) underwriting loss last year, the largest shortfall in its 100-year history. Allstate’s auto-insurance underwriting loss was $3 billion, while Berkshire Hathaway’s Geico car-insurance unit lost $1.9 billion.
These woeful results have shaken confidence in the industry’s purported ability to assess risk and forecast accurately. Insurers are belatedly hiking premiums, though often not as quickly as they’d like. Customers who drive Range Rovers, and other vehicles prized by thieves, may struggle to get coverage at all.
Soaring used-car prices are the proximate cause of insurers’ woes–a textbook example of how supply chain upheaval can cascade through the economy. Historically, vehicles were a depreciating asset, but suddenly the cost of replacing a stolen or damaged vehicle was far more than insurers had calculated.
Regrettably, human behavior is also to blame for rising costs–and I’m not just talking about litigation-happy lawyers. “During the pandemic, people got used to driving really fast. And when people got back on the road, they still like to drive really fast. And so, you end up with more severe accidents,” Allstate Chief Executive Officer Tom Wilson told an investor event in December.
He might also have mentioned the worrying tendency of drivers to look at their phones instead of the road. Insurers have therefore been forced to increase reserves for bodily injury.
Theft–both of vehicles and their valuable catalytic converters–is also on the rise. More than 1 million vehicles were reported stolen in the U.S. last year–the most since 2008. Insurers are refusing to cover Hyundais and Kias because they are stolen so often using break-in tips shared on social media.
Some insurers anticipated claims inflation and raised premiums early. Progressive surpassed Geico to become the No. 2 U.S. insurer for individually owned cars last year while still achieving a 4 percent pretax underwriting profit margin. It was aided by comparatively low expenses and vehicle-monitoring telematics that helped it attract less risky drivers.
In fairness, these companies have had to navigate volatile conditions. People drove much less during the early part of the pandemic and so there were fewer crashes. Insurers were very profitable, despite lowering prices and issuing rebates.
Raising prices quickly is hard in the U.S. because auto insurers usually must ask state regulators for permission. California, New York and New Jersey officials have resisted big adjustments, whereas Texas, Georgia and Illinois are more flexible, executives say. Some insurers are choosing to forgo selling policies until pricing reaches a level they can make money. Several have won approval for 7 percent increases in California in recent weeks, though that’s less than the rate at which claims costs are rising.
While Geico has forecast an underwriting profit in 2023, used-car prices remain stubbornly high and so most insurers can expect another difficult year. For their customers, the inflationary storm is only just beginning.
