Why Auto Insurance Rates are Likely to Increase in 2018

Why Auto Insurance Rates are Likely to Increase in 2018

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If you thought your auto insurance rates increased an unjustifiably high amount in 2015, 2016 and 2017, there isn't much good news for 2018. Auto insurance companies posted another year with slim to negative profit margins due to an uptick in costly car accidents and disastrous storms. The likely result will be more rate increases in the coming years — even for excellent drivers.

Why are auto insurance rates continuing to climb?

Like any business, companies need to sustain higher revenue than expenses in order to stay viable. Auto insurance is no different; companies make money from the premiums customers pay, but lose money when they fulfill their obligation to pay for damages. They also have a host of operating expenses to pay, including agent compensation and advertising.

The proportion of expenses to revenue is called the "combined loss ratio," and whenever it is above 100%, the company loses more money than it is earning. In 2016, only two of the top 10 auto insurance companies in the country had combined ratios below 100% — and just barely.

Company
Premiums written ($B)
Premium increase since 2015
Combined loss ratio 2016
State Farm39.197.25%117%

Berkshire Hathaway25.1311.94%99%
Allstate20.813.88%100%
Progressive19.6312.08%96%

USAA

11.6910.69%107%
Liberty Mutual10.768.18%109%

Farmers

10.303.19%111%
Nationwide7.642.30%114%
American Family4.018.43%109%
Travelers3.9015.38%105%
Berkshire Hathaway is the parent company of Geico.

Source: SNL Financial

So, even if you have never been in an accident, your rates may still go up because insurers are trying to bring their ratios below 100%. Imagine a major drought destroying part of a farm's crops, and then the farm charging more for the crops that survived in order to make up for the ones they lost. It’s the same principle with your auto insurer.

In 2010, the situation was the exact opposite. Only two of the top 10 companies were operating with combined loss ratios over 100%. The average combined loss ratio was 99.7% in 2010, compared to 107.1% in 2016. The average combined ratio has climbed year after year, and as a result, auto insurance rates have gone up an average 20% across the country.

graph shows the profit margin for the top twenty auto insurance companies

Unfortunately, the rate hikes have not been effective at closing the gap between profit and loss. All the insurers in the table increased their written premium revenues in 2016 (mostly due to rate hikes), yet they still (with the exception of Allstate) ran higher combined loss ratios. The current trend indicates that the companies are getting further from turning underwriting profits again. Even after three solid years of increases, the companies are not just still losing money — they're losing an even greater amount.

Why are auto insurance companies losing so much money?

In their financial statements, Geico, Progressive and Allstate didn’t hesitate to blame bad weather as a significant source of their losses. In its financial statement, Progressive said catastrophe losses as of the end of the third quarter were "$121.0 million greater than in the same period last year." They attributed $85 million to Hurricane Matthew alone.

Comprehensive claims, which may result from catastrophic weather, can average upwards of $1,700 per claim, according to the Insurance Information Institute, so those figures make sense given the number of people that could be affected by a hurricane. The floods in Louisiana, which were also explicitly cited in financial statements, also ended up costing insurers millions of dollars.

But it’s not just the weather. Drivers are crashing more than they have in nearly a decade. The National Safety Council, a nonprofit organization that advocates for safety, found that fatal motor accidents went up 6% from 2015 to 2016, for a total of 40,200 fatalities — the most since 2007. The National Highway Traffic Safety Administration blames distracted driving due to texting as a large source for the increase in fatalities.

More disasters and more accidents lead to more claims, thus more payouts from insurers. In 2017, the number of households with at least one auto insurance claim in the past three years increased by 3,869,969 compared to 2014. In 2017, 22.2% of households had at least one auto insurance claim, while 20.5% had one in 2014. Nielsen, which compiled the data, projects that by 2022, 22.5% of households will have at least one auto claim.

How much will car insurance cost in the future?

It’s difficult to pinpoint future auto insurance pricing with certainty. What you could pay for auto insurance in the near future is likely more than what you are paying now — even if you have a clean driving record.

The trends that are causing more accidents — lower gas prices leading to more drivers on the roads, drivers distracted by texting and so on — are not likely to abate. Other important factors like severe weather are difficult to predict.

The Colorado State University Tropical Weather & Climate Research has forecasted this hurricane season to be below average in terms of the number of named storms. They cannot predict however how many of those storms will hit the U.S. So, even if hurricane season is below average in terms of the number of storms, if the number of storms that hits the U.S. is above average, the property damage costs would be enormous and an even heavier burden on insurers.

On the other hand, if the weather turns out to be favorable, or another factor discourages people from driving, insurers may start to see better margins and feel no need to raise rates further. Again, it is all speculative and only time can tell.

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