Continued upward pressure on claims severity across coverages has prolonged the post-pandemic recovery for the private auto business as carriers will continue to implement large rate increases in the near term.

➤ S&P Global Market Intelligence's 2023 US Auto Insurance Market Report projects that private auto results will improve from 2022's worst-in-decades combined ratio of 112.2%, though not as rapidly as we previously expected or the industry had hoped.

➤ The post-pandemic return to normalcy has played out differently than most market participants envisioned. Stubbornly elevated crash severity has defied the longer-term trend, reflecting secular changes in working patterns and other factors that have resulted in more wrecks occurring at higher rates of speed. Increases in severe crashes have precipitated a rise in litigated claims, which drive up costs. Severe weather and a surge in vehicle thefts have resulted in higher losses in the comprehensive coverage.

➤ The industry has responded aggressively to deteriorating results with multiple rounds of sizable rate increases, but carriers' ability to realign rates to reflect higher loss costs varies widely by geography. We continue to expect that they will eventually succeed in that initiative albeit over a longer timeline and with greater increases in premium rates than we had previously envisioned. Our revised forecast for 2023 direct premiums written growth of 15.9% would easily surpass the previous 25-year-high rate of increase of 10.2% in 2003.

Loss-cost inflation to eventually subside

Upward pressure on claims frequency and severity has often been linked to fallout from pandemic-era supply chain pressures and a return of more normal levels of driving after the COVID-19-induced cratering in 2020. But the root causes of a staggering 23.9-percentage-point swing in the industry's private auto net incurred loss ratio between 2020 and 2022 have become more numerous with the passage of time.

– Although seasonally adjusted vehicle miles traveled as compiled and modeled by the US Bureau of Transportation Statistics exceeded the comparable pre-pandemic month in July 2023, the most recent period for which data is available, the pace of the rebound has been uneven and the nature of the accidents that have been occurring is different as many Americans have reduced or eliminated their daily commutes to work.

– Crash involvement rates as measured by the US National Highway Traffic Safety Administration increased among passenger cars, light trucks and large trucks to their highest levels in years in 2021, the most recent period for which the data is available. The rate of 1.96 per 100 million vehicle miles traveled for passenger cars marked a 24-year high. The crash statistics deteriorated throughout the 2010s reflecting the rise of distracted driving, but they worsened markedly in 2020 and 2021.

– Not only did crashes occur more frequently on a relative basis, but they have also been more severe. US National Highway Traffic Safety Administration data and estimates show that the fatality rate in police-reported crashes per 100 million vehicle miles traveled hit or exceeded 1.40 six times in a 10-quarter stretch ended in the third quarter of 2022. Prior to the pandemic, quarterly fatality rates ranged from 1.05 to 1.18 in 2019, and they most recently equaled or exceeded 1.40 in the third quarter of 2007.

– Sharp increases in the theft of catalytic converters and entire vehicles have impacted the frequency of comprehensive claims and, in the case of the latter, the severity as well. The National Insurance Crime Bureau reported that the number of stolen vehicles hit a 14-year high in 2022 at just over 1 million.

– A changing climate has also affected comprehensive claims frequency and severity with the flood peril particularly in focus over the past year. Hurricane Ian's impact on Florida was especially noteworthy in this regard as we estimate that the Sunshine State's private auto physical damage direct incurred losses were approximately $2.17 billion above what they otherwise would have been in 2022 had they expanded at the same rate as the rest of the nation. Reports of numerous flooded vehicles in the New York metropolitan area at the end of September offered a recent reminder of the associated risks. In 2012, when Superstorm Sandy struck the region, New York's private auto physical damage direct incurred loss ratio spiked to a 25-year high of 101.2%.

Carriers continue to report claims severity headwinds in the form of social inflation, in large part due to a rise in litigated claims and economic inflation as costs to repair and replace vehicles remain elevated. Various measures of used vehicle values have fallen from their 2022 peaks but remain well above pre-pandemic levels; year-over-year rates of increase in the US Consumer Price Index's motor vehicle maintenance and repair component have remained in the double-digits after peaking in January due in part to rapidly rising skilled labor costs.

While it would seem unlikely that these costs would meaningfully reaccelerate, the United Auto Workers' strikes on Ford Motor Co., General Motors Co. and Stellantis NV inject some additional uncertainty into the outlook for the prices of used vehicles and vehicle parts.

Amid the stubbornness of economic inflation and concerns around social inflation, carriers continue to hold the line on variable expenses such as advertising and press for significant rate increases.

Historic premium growth

Federal Reserve interest rate policy has generally succeeded to date in curbing runaway inflation, but due in large measure to the multiple sources of upward pressure on loss costs, the motor vehicle insurance component of the Consumer Price Index has emerged as one of the most significant exceptions to the broader rule.

The motor vehicle insurance CPI increased by 19.1% in August, its highest year-over-year rate in any month since December 1976. The 13-consecutive year-over-year double-digit percentage increases in the motor vehicle insurance CPI from September 2022 through September 2023, including the latter month’s rise of 18.9%, represented the longest such stretch since the mid-1980s.

Based on the approved rate increases scheduled to take effect through the balance of 2023, we see no immediate catalysts for a material retreat in the recent pace of expansion.

While the motor vehicle insurance CPI is not a proxy for private auto premium growth, it is one of the observations we consider when projecting future rates of expansion for the business line. Other observations we consider include aggregate approved rate change data from S&P Global Market Intelligence's RateWatch application, industry-weighted average approved rate change data generated by our P&C Rate and Product Filings Trend Analysis and Histogram template and trends in the monthly earnings reports of No. 2 US private auto insurer Progressive Corp. Trailing-12-month personal auto net premiums written growth at Progressive of 21.8% is the company’s highest on record since at least the start of 2010.

Each of those indicators suggests full-year growth in private auto direct premiums written at a rate in excess of the 13.4% we previously projected and the 11.4% expansion the industry achieved in the first half of 2023. In addition to the momentum for the second half of the year from successive rounds of rate increases, we estimate the latter figure is understated by approximately 70 basis points due to the effect of the enforcement of restrictions on the release of quarterly data from New Jersey-domiciled carriers that began in the third quarter of 2022.

Our 2024 outlook for direct premiums written growth of nearly 9.1% in the private auto business contemplates a continued tailwind from rate increases, particularly in states such as California, where pricing actions significantly lagged the onset of the claims severity spike. Private auto direct premiums written increased by only 3.1% in California in 2022, which was less than one-half of the total-filed pace.

Beyond 2024, we expect written premium growth rates to revert rather rapidly toward long-term historical averages in the mid-single digits as we anticipate that the predominance of six-month policy terms among most of the largest carriers will facilitate a catching up to loss costs.

The Hartford Financial Services Group Inc. Chairman and CEO Christopher Swift, who predicted in July that it would be 2025 before his company's private auto business would return to targeted levels of profitability, recently described the ongoing effort as "a long slog." That phrase seems appropriate given that a third year of significant rate actions is already underway.

Methodology

Historical results for all business lines are generally derived from a proprietary aggregation of disclosures made by individual insurance companies on Parts II and III of the Insurance Expense Exhibit of annual statements for calendar years 2012 through 2022. State funds and residual market entities are excluded from the results and outlook though this does not have a meaningful impact on the private auto business.

The projections reflect various assumptions regarding premiums, losses and expenses. They are displayed on a total-filed basis and are not intended for application to individual states, regions or companies.

Important considerations for our combined ratio calculations for historical and projected results include the following: 1) the results include policyholder dividends unless otherwise noted and 2) we base expense ratios as the combination of other underwriting expenses and aggregate write-ins for underwriting deductions as a percentage of net premiums earned.

^{Please see the full "US Auto Insurance Market Report" for a more comprehensive discussion of the methodology employed.
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.}