Rising Auto Costs Casualty Actuarial Society Annual Meeting November 7, 2017 James Lynch, FCAS MAAA, Chief Actuary Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5533 jamesl@iii.org www.iii.org
Personal Auto Rising Frequency, Severity Pinching the Largest P/C Line
Auto Net Combined Ratio 115% 110% Commercial Personal 110% 106% 105% 100% 95% 95% 94% 90% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loss Ratios Have Been Rising for a Decade. 2016 Return on Net Worth is Likely Close to Zero or Negative. Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 3
P/C Direct Incurred Loss Ratio by LOB LOB 2017 2016 Change From Year Earlier Personal Auto Liab 70 72 (2) Homeowners 64 56 8 PhysDam (PA, CA) 65 67 (2) GL (incl Products) 54 52 3 WC 54 54 0 Fire & Allied Lines 53 57 (4) CMP 53 51 Comm Auto Liab 66 64 2 2 Other 48 45 3 Total 61 59 1 Through Q2. Differences may not add up due to rounding. Sources: NAIC data from S&P Global Intelligence, Insurance Information Institute. Positive Number = Bad News 4
Rising Accident Costs All Coverages Affected Increase in Loss Costs, 2015:Q2 2017:Q2 Bodily Injury 14.1% Property Damage 14.0% Personal Injury Protection 13.2% Collision 11.1% Comprehensive 25.4% From 2015 to 2017, the cost of accidents has risen dramatically. By contrast, consumer prices overall rose 3.3 percent during 2015 and 2016. Source: Fast Track Monitoring System. 5
Why Personal Auto Loss Ratios are Rising: Severity & Frequency by Coverage, 2017 vs. 2016 Annual Change, 2016 Over 2017* 12.0% Severity Frequency 11.1% 10.0% 8.0% 7.7% 6.0% 4.0% 2.0% 0.0% 4.2% 0.6% 3.2% 2.1% 2.2% -2.0% -1.1% -1.1% -4.0% Bodily Injury Property Damage Liability -2.8% PIP Collision Comprehensive Frequency Spike Has Lessened. Severity Is Now the Problem. *Four Quarters Ending in June. Source: Fast Track Monitoring System. 6
Claim Trends by Coverage Focus on Collision
Collision Claims: Frequency Trending Higher in 2010s Annual Change, 2006 through 2017 6.0% 4.6% 4.0% 2.0% 0.0% -2.0% -4.0% 3.1% 2.2% 0.9% 1.4% 0.8% 0.2% -0.2% -1.2% -1.9% -2.8% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* For a Long Time, Claim Frequency Was Falling, But Since 2010 This Trend Seems to Have Reversed. *Four Quarters Ending in June. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 8
Collision Claims: Severity Trending Higher in 2010-2017 Annual Change, 2006 through 2017 8.0% 6.0% 5.7% 4.0% 2.0% 4.1% 1.7% 3.1% 2.5% 1.7% 4.1% 2.1% 0.0% -2.0% -4.0% -0.5% -0.8% -1.7% -2.8% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* The Great Recession and High Fuel Prices Helped to Temper Claim Severity, But These forces Have Clearly Reversed, Consistent with Experience from Past Recoveries. *Four Quarters Ending in June. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 9
What s Driving These Trends? Frequency; Severity; Distraction?
Road Safety Better Economy = More Drivers = More Accidents Economic well-being Distracted driving 18 Percent of Injury Crashes Safety Devices Can Be Expensive Expensive auto parts Why rates go up Faster driving Speed Still Kills Legalized marijuana It s Not Funny Source: Insurance Information Institute research. 11
America is Driving More Again: 2000-2017 Percent Change, Miles Driven* 3.5% 2.5% 1.5% 0.5% 1.7% 2.1% 1.5% 2.2% 1.9% 1.0% 0.4% 0.3% 0.8% 0.1% 0.6% 1.9% 2.7% 1.9% -0.5% -1.5% -0.3% -0.3% Fastest Growth in More Than a Decade -2.5% -2.1% 2001 2003 2005 2007 2009 2011 2013 2015 2017* Tremendous Growth In Miles Driven. The More People Drive, The More Frequently They Get Into Accidents. *Moving 12-month total vs. prior year through March. Sources: Federal Highway Administration; Insurance Information Institute. 12
06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q1 More Miles Driven => More Collisions Billions of Miles Driven in Prior Year Overall Collision Claims Per 100 Insured Vehicles 3,250 6.2 3,200 Recession Miles Driven (left axis) Collision Claim Frequency (right axis) 6.1 3,150 3,100 6.0 3,050 5.9 3,000 2,950 5.8 2,900 5.7 2,850 2,800 5.6 2,750 5.5 The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher. Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute. 13
06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q1 Why Are People Driving More Miles? Cheap Gas? Billions of Miles Driven in Prior Year 3,250 Recession 3,200 3,150 3,100 3,050 3,000 2,950 2,900 2,850 Miles Driven (left axis) Average Price Per Gallon $4.50 Gas Prices (right axis) $4.00 $3.50 $3.00 $2.50 $2.00 2,800 $1.50 Gas Prices Don t Seem Correlated With Miles Driven. Sources: Federal Highway Administration; Energy Information Administration (All Grades All Formulations Retail Gas Prices); Insurance Institute for Highway Safety; Insurance Information Institute. 14
06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q1 Why Are People Driving More Miles? Jobs? Billions of Miles Driven in Prior Year 3,250 Recession 3,200 3,150 3,100 3,050 3,000 2,950 2,900 2,850 Miles Driven (left axis) Millions Employed # Employed (right axis) 150 145 140 135 130 125 2,800 120 People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement. Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics via FRED; Insurance Institute for Highway Safety; Insurance Information Institute. 15
06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q1 More People Working and Driving => More Collisions, 2006-2017 Number Employed, Millions 150 Recession 145 140 135 130 125 Overall Collision Claims Per 100 Insured Vehicles Number Employed (left axis) 6.2 Collision Claim Frequency (right axis) 6.1 6.0 5.9 5.8 5.7 5.6 5.5 5.4 5.3 120 5.2 When People are Out of Work, They Drive Less. When They Get Jobs, They Drive to Work, Helping Drive Claim Frequency Higher. Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Information Institute. 16
Collision Frequency Collison Frequency Comparing Gas Prices, Employment on Collision Frequency Through 2017 6.05 6.00 5.95 5.90 5.85 5.80 5.75 5.70 5.65 5.60 5.55 Gas Price vs. Collision Frequency 5.50 1.75 2.75 3.75 Gasoline Price per Gallon 6.20 6.10 6.00 5.90 5.80 5.70 5.60 5.50 Number Employed vs. Collision Frequency 5.40 125 130 135 140 145 150 Millions Employed Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Energy Information Administration; Rolling Four-Qtr Avg. Frequency from Fast Track Monitoring System; Insurance Information Institute. 17
Severity: Driving Fatalities are Rising Annual Change in Motor Vehicle Deaths 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Seatbelt Use Rose to 62% of Drivers, From 49% in 90-5.9% -7.0% Big Drop-off Due to the Great Recession -3.0% -9.5% -9.0% -2.4% 6.7% 6.5% Driving Has Been Getting Safer for Decades, But Recent Trend is Discouraging 40,000 Deaths in 2016. Sources: National Safety Council, Insurance Information Institute. 18
Medical Inflation Heating Up Annual Percent Change, CPI - Medical 5.0% 4.6% 4.7% 4.4% 4.2% 4.0% 4.4% 4.0% 3.0% 4.0% 3.7% 3.2% 3.4% 3.0% 3.7% 2.5% 2.4% 2.6% 3.8% 3.2% 2.0% 1.0% 0.0% Fastest Growth in More Than a Decade 2001 2003 2005 2007 2009 2011 2013 2015 2017* Injury Severity Typically Exceeds Medical CPI. *First Half vs. Year Earlier. Sources: St. Louis Federal Reserve (FRED), Bureau of Labor Statistics Series ID CUUR0000SAM; Insurance Information Institute. 19
Does Spending on Vehicles Affect Claim Severity? Annual Change, 2005 through 2017 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -4.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Collision Severity (left scale) Previous 6-yr avg vehicle purchases (right scale) -6.0% As the Economy Has Gotten Better, People Are Spending More on Vehicles When Those Cars Wreck, Severity Increases. Source: Fast Track Monitoring System; Bureau of Labor Statistics Consumer Expenditure Survey (vehicle purchases net outlay) Insurance Information Institute. 20
Fixing a Bumper... On an Entry-Level Luxury Car (~$35K) 2014 Cost vs. 2016 Cost What Has Changed? $3,000 $2,500 $2,000 2,818 2014 2016 Grille: Distance Sensor $0 $2,818 Headlamp Assembly 394 918 Mechanical Labor 0 108 $1,500 $1,000 $500 1,225 621 733 Fewer Accidents, Higher Costs Parts: 130% Higher $- Parts Labor Labor: 18% Higher 2014 2016 Total cost: $1,705 higher 2016 vehicle has LED headlights and adaptive cruise control. SOURCE: Liberty Mutual Insurance. 21
What About Distractions? It s A Problem. Is It Growing? What We Do Behind The Wheel But Impact Is Not Clear Percentage of Drivers Who.. 70% 60% 50% 65% Talking Less... 51%...Typing More Percentage of Crashes Involving Distraction 20% 15% 40% 30% 31% 36% 29% 10% 20% 10% 0% 13% Talk on Phone Text Surf the Net 2009 2015 5% 0% Total Crash Fatal Crash Injury Crash PDO* Crash 2010 2011 2012 2013 2014 2015 * Property Damage Only. SOURCES: State Farm, National Highway Transportation Safety Administration (distraction.gov) Most Recent Year 22
Weed Spreads Like Wildfire Insurers Caught in the Middle Percent Change in Collision Frequency, 2012-2016* 16 14.0 12 8 4 6.2 4.5 3.0 0 * Vs. Neighboring States. SOURCE: Highway Loss Data Institute. 23