Auto Insurance In An Existential Crisis

by Stephen Applebaum and Alan Demers —

The phrase “existential crisis” has been admittedly overused in recent years, and sometimes for good reasons, but it is no less apt when applied to today’s P&C insurance industry.

Macro Influences

After many long years of stability, the 125-year-old, $300 billion U.S. auto insurance industry is caught between runaway inflationary cost pressures on one side and consumer wallets, many of which are no longer able to afford the spiraling auto insurance premium increases, on the other.

In the middle is the $42 billion U.S collision repair industry (of which $39 billion is paid by insurance) which has been experiencing severe technician shortages, rising labor costs and pricing pressure from carriers as average repair costs have jumped 50% over the past few years. These increases can be primarily attributed to the cost of replacement parts, scanning and calibration for newer model vehicles which are now bristling with electronic Advanced Driver Assistance System (ADAS) features and related sensors. The even higher costs of repairing the rising number of Electronic Vehicles (EVs) further exacerbates the problem. In fact, some carriers are now writing off EVs with just moderate damage as Total Losses because of their much higher repair costs than like Internal Combustion Engine (ICE) vehicles. Total losses, which are costly for insurers, now represent almost 25% of all insured auto claims.

Much of the underlying repair cost discussion has centered around the more visible and tangible parts prices, supply chain inflation and delays. Longer rental car terms during the repair process, up from pre-Covid years at around 11.5 days to over 20 and now resting closer to 19 days have been cited as well. A closer look reveals a double-digit percentage jump in body shop labor rate increases, a significant change in the marketplace which is unlikely to recede.  As independent body shops continue to reduce in number, venture capital backed MSO (multi-shop operator) models continue to expand, many of which are essential to insurance carrier DRP (direct repair program) networks which were introduced to deliver long-term repair cost and other business benefits.

The advent of MSOs promised to further advance repair consistency and volume cost benefits thus insurers openly embraced this new advantage in hopes of wrangling the fragmented repair space. Ironically, MSOs are now more able to flex their scale, raising rates as well as even limiting their participation in insurer DRPs, demonstrating greater influence in the marketplace. Carriers with lower density of customers in select markets are becoming powerless and more challenged in containing repair costs since volume and relationships have a louder voice. Many on the insurer side have feared that the auto repair industry would someday become akin to the healthcare insurance model in which services are rendered and reimbursed, losing the ability to contain costs.

Although this article emphasizes auto repair cost increases which are likely permanent, there are additional long-lasting culprits afoot. Social inflation is proving to be a real factor as juror and public sentiment regarding justice is changing. Add in litigation funding and the growing capital behind this budding “cottage” industry. Driver behavior and decreased law enforcement in order to prioritize on other crimes have been well studied and are offsetting gains from ADAS systems. Finally, medical costs show no signs of slowing, including the less obvious cost-shifting as the Medicare Secondary Payer rules established in 2018 extend each year with the desired effect – more costs being paid by P&C claim policies.

Telematics

Many of the influences that had been keeping these cost increases at bay are no longer able to contain them.

Telematics supported Usage Based Insurance (UBI) programs enabled a large group of better (safer) drivers to take advantage of insurance discounts which these programs offered but adoption has levelled out at under 20% of policies, as the market awaits the next generation of telematics programs that go beyond discounts to “always on” emergency response and accident management for all policyholders. As a reflection of this market’s maturation, global market leader Cambridge Mobile Telematics (CMT) acquired rival True Motion, the second largest mobile telematics provider, in 2021.

UBI programs continue to evolve with emphasis on driver safety, saving lives and coaching components more commonplace in personal lines rather than fleet (commercial vehicles) coverage. Westfield Insurance launched ‘Mission Safe’ in May of 2023 which rewards drivers, and provides feedback and incentives, thus differentiating it from others. ‘Drive Safe’ from State Farm, Allstate’s ‘DriveWise’, ‘SmartRide’ from Nationwide and Farmers’ ‘Signal’ program work similarly as switch-to-save models by enticing drivers with 30%-40% initial discounts with the motivation to maintain discounts through good driving behaviors.

Telematics based insurance selection and pricing pioneers, Progressive Insurance maintain their leading edge and recently announced their “Accident Response” initiative focused on accident management and crash detection for all drivers, independent of a UBI program.  However, tangible driver behavior and safety remains elusive with distracted driving on the rise.

Technology

Technology delivered real cost savings to both the auto insurance and collision repair industry for many years, peaking in 2022 as pandemic related changes normalized.

Auto insurers discovered that policyholders were willing, indeed anxious, to take pictures of accident damage with their smartphones to avoid contact with adjusters. And taking the appetite for a “touchless” claim experience a step further, carriers began adopting digital claim payments to policyholders and collision repairers. Not missing the opportunity to reduce overhead, carriers pared their adjusting staffs and sold off less occupied physical facilities. The gains from these major adjustments ended in 2022 as the pandemic eased, and the remaining claim staff resources are challenged to meet the higher claim volume as motorists returned to the roads, along with their more dangerous driving habits acquired on relatively empty streets and highways.

Collision repairers, especially the better funded Multi-Shop Operators, also embraced a host of cost-savings technologies spanning the intake and operational function of car repair, including repair planning, higher throughput painting and drying booths, scanning and calibration, automated parts procurement and customer communication technologies.  Again, most of the economic gains from these advances are now “baked in” while the tide is changing toward higher cost of repairs.

The Great Rebalancing

As a result of all the above, there is a “Great Rebalancing” underway as each of the major stakeholders scramble to adjust to the new normal. The critical question is whether they can both adapt quickly enough to forestall what could be a major consumer and/or investor led disruption.

A consumer groundswell of resistance to further auto insurance price increases could lead to broader market interference by state or federal regulators who have the power to effectively influence rates (much like is playing out now for auto in California and recently in the Florida property insurance market).

It is not unreasonable to expect accelerated consolidation within the auto insurance market as investors, Boards and financial activists push the worst performing carriers to explore all strategic options.

And as the collision repair industry continues to consolidate as a result of additional investor involvement, the largest MSOs have gained and will likely exceed negotiating parity with auto insurers and extract better commercial terms to cover their rising costs, thus adding further pressure on auto insurers’ results.

Overlay on all of this the slow but sure conversion of the car park from ICE to EV vehicles as the expected self-imposed 2035 switch over deadline approaches, along with the higher price tags, operating and repair costs for these battery-operated “computers on wheels”, and consumers are going to have to absorb further material increases in their cost of transportation.

You should not conclude that we are pessimistic about the outcome here. We are confident that American ingenuity, bolstered by new and exciting technologies, and our faith in the American appetite for affordable mobility, will prevail. What we can’t see quite as clearly is exactly how and where the various players will come out.

About the Authors

Stephen E. Applebaum, Managing Partner, Insurance Solutions Group, is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem focused on insurance information technology, claims, innovation, disruption, supply chain, vendor and performance management. Mr. Applebaum is also a Senior Advisor to Waller Helms Advisors.  WHA is the premier investment banking boutique focused on the crossroads of the Insurance, Healthcare and Investment Services sectors.

Stephen is a frequent chairman, guest speaker and panelist at insurance industry conferences and contributor to major insurance industry publications and has a passion for coaching, mentoring, business process innovation and constructive transformation, applying disruptive technology, and managing organizational change in the North American property/casualty insurance industry and trading partner communities. He can be reached at [email protected].

Alan Demers is founder and president of InsurTech Consulting LLC, with 30 years of P&C insurance claims experience, providing consultative services focused on innovating claims. After initiating and leading claims innovation at Nationwide, Demers collaborates in the forefront of InsurTech, partnering with insurance leaders, startups, design thinking experts and service providers to modernize personal, commercial and specialty claims.

As Vice President of Claims Innovation at Nationwide, Alan conceptualized a vision and road map to build next-generation claims, automating and digitizing claims experiences, progressing from inception through prototype testing. He served as a founding member of the Corporate Innovation Council and played a key leadership role in establishing goals, practices and an innovative culture at Nationwide.

Alan is an accomplished executive leader and has worked for two separate Fortune 100 insurance companies in a number of corporate, national and regional leadership roles among personal, commercial, non-standard and specialty lines claims. Prior to leading claims innovation, he served as head of claims for Nationwide’s commercial agribusiness and non-standard claims. Other noteworthy roles include: field vice president, regional claims officer and national catastrophe director, quality assurance director.

Alan began his career with Aetna as a claim adjuster and advanced to a corporate claim consultant, prior to joining Nationwide in 1995.

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