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Root seeks 62.4% Calif. rate increase to avoid up to 15 years of smaller hikes

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Root seeks 62.4% Calif. rate increase to avoid up to 15 years of smaller hikes

Private auto insurers have generally sought since the 1988 passage of Proposition 103 to keep their requests for California rate increases under 7.0%, but the extent of the state's pandemic-era moratorium on hikes has led a growing number of carriers to decide they have little choice but to seek considerably more.

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Days before management at private auto insurtech Root Inc. said during a Feb. 23 earnings conference call that they were aggressively pursuing rate increases in the company's higher loss-ratio states, Root Insurance Co. filed for one of the largest California private auto rate hikes on record in at least the past 25 years.

The proposed overall rate change of 62.4% on a book with approximately $8.0 million in adjusted annual premium is well beyond the 7.0% Proposition 103 threshold for the prospective initiation of a public hearing, and it far surpasses the highest private auto rate increase that had been submitted to the California Department of Insurance during the first eight weeks of 2023: Wawanesa General Insurance Co. 's Jan. 4 proposal to raise its private auto rates in the state by 39% , overall.

The regulator has increased its pace of private auto rate filing approvals in recent months, including its sign-off on an overall hike of 17.4% for a private auto program underwritten through the independent agency channel by two The Progressive Corp. subsidiaries. But the magnitude of the rate increases sought in certain of the recent submissions may produce further headline risk even as the industry is emerging from what will likely rank as its worst private auto results in a generation.

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Wawanesa General positioned its large rate increase as a necessary step for the California-centric company's ability to continue to write business after a previous request was subjected to a public hearing in 2022. For Root, the rate filing represents the company's first proposed increase of any amount in California since it began writing in 2019.

The company argued in its filing that the business has been "underpriced in California since implementation," as evidenced by calendar-year incurred loss ratios of 89.4% in 2020, 108.9% in 2021 and a result for 2022 that was "comparable" to the prior year. The 2022 loss ratio based on the combination of paid losses and case reserves was 111.0%, up from 87.5% in 2021. For the first nine months of 2022, data reported by Root Insurance Co. on Schedule T of its most recent quarterly statutory statement show a ratio of paid losses to direct premiums written of 108.9% in California. That represented its second-highest such ratio in the 24 states from which Root Insurance generated at least $5 million in direct premiums written during that period, behind only Mississippi.

During 2022, Root said that it implemented 53 rate filings with an average increase of 37% across its total book in a development that contributed to sequential improvement in its gross accident period loss ratio in the second half of the year. In California, however, Root had not previously pursued a private auto rate increase due to a combination of unique circumstances that included the "low credibility" of its initial results and the regulator's "freeze on rate approvals beginning in May 2020."

Correspondence associated with various filings for rate increases submitted but not disposed prior to the declaration of a global pandemic in March 2020 included encouragement from the California Insurance Commissioner Ricardo Lara for carriers to reconsider their continued pursuit of the proposed hikes in light of insureds' changed behaviors. More recently, correspondence between the department and a GEICO Corp. company in July 2022 indicated that the regulator's staff had "not been given permission to work on rate increase filings" for pandemic-impacted personal lines. The department eventually approved a filing for a 6.9% rate increase for a subsidiary of The Allstate Corp. in October 2022. S&P Global Market Intelligence has record of approvals of at least nine filings for rate increases on California personal auto business on a year-to-date basis through Feb. 23, including from Mercury General Corp., United Services Automobile Association , and Interinsurance Exchange of the Automobile Club and/or their subsidiaries. All but the two Progressive submissions call for overall rate changes of below the 7.0% threshold.

Were Root to seek a 6.9% rate increase, the company said in its filing, it "would likely take" between 10 and 15 years of annual hikes in that amount before it would break even in the state.

"Since Root's rating plan is so underpriced, our financial position in California necessitates a large rate increase as we implement what otherwise would have played out as multiple consecutive smaller increases over the last three years," the filing said. This contrasts with Root's experience in Texas, the company's largest state based on direct premiums written through the first nine months of 2022, where it implemented five separate rate increases on renewal business during the past two years in amounts of 3.0% in April 2021, 5.0% in September 2021, 20.1% in February 2022, 18.5% in July 2022 and 19.6% in January 2023.

Root added in the California filing that it was "requesting less than the minimum permitted rate change as our trends in certain coverages are out of pattern with the industry during the evaluation period." The state's prior-approval template shows a minimum change of 75.0% and a maximum change of 130.4% across coverages. This compares with a templated range of between 5.6% and 37.6% in connection with the aforementioned 17.4% Progressive rate increase, for example.

The largest rate increase approved by California on personal auto business in the last 20 years for the combination of liability and physical damage coverages appears to have been a 2003 filing for a 60.2% overall hike for an American Modern Home Insurance Co. motorcycle program, according to the state's Web Access to Rate Filing Forms database.

There are several other proposed double-digit hikes pending on California private auto business. CSAA Insurance Exchange and California Casualty Indemnity Exchange filed for overall rate increases of 25% and 22.4% on California private auto programs within the past month. Travelers Commercial Insurance Co., meanwhile, on Feb. 17 revised a previously submitted filing for a 6.9% rate increase to an overall hike of 19.0% for California Quantum Auto 2.0 business to reflect two additional quarters of loss experience.

"We have continued to monitor the adequacy of our book and our experience continues to deteriorate," The Travelers Cos. Inc. subsidiary said in its amended filing. "We are also recognizing the Department's commentary concerning companies requesting the rate that they need and can justify, rather than requesting below +7%."

The emergence of proposed rate increases of that magnitude could give rise to further pushback from consumer groups, which appear to remain opposed to hikes of any size. The Los Angeles Times on Feb. 21 posted an article warning that some Californians could face a "nasty surprise" in the form of auto insurance rate increases in 2023, specifically citing recently approved GEICO and Mercury hikes. The article included quotes from a consumer advocate who argued that private auto insurers still owed policyholder COVID-19 rebates and should not be granted rate increases until those get paid.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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