Unprofitable Insurance: Tail Effect Hits Auto Lines
By Stephen Applebaum and Alan Demers —
Since 2020, the world has seen more change, disruption and surprises than any period in recent memory – and the U.S. personal auto and property insurance market is no exception. Declining auto claims and associated consequences are now in focus.
The P&C industry has endured catastrophes, runaway inflation, highs and lows of pre-/post-COVID accident frequency and crushing supply chain blows driving insurer loss costs to new heights. Through all of this, auto insurance lines are recovering and are on track to achieve a 98.4 combined ratio in 2024 per S&P forecasts. A far cry from the height of the insurance crisis peak years posting an inferior auto combined ratio of 104.9 in 2023 and a dreadful ratio of 112.2 in 2022. As premiums catch up a number of underwriting actions are now reshaping insurance products and consumer responses. One such change in consumer behavior, among several, is a decrease in auto damages being claimed.
Insurance parlance is often accused of being an insider’s only language or unnecessarily complex. The insurance ‘tail’ effect, however, is easy to follow and applies here – famously.
Claims, reserve adjustments and both rate-setting and underwriting actions all produce a tail effect which will only be fully realized at a later time. Catastrophic events produce losses into the future after the original loss date and are inherently termed, long-tailed. Have you ever wondered what happens with those initial loss projections that are tossed around as either absolute or sometimes in tens of millions of dollar range differences? The tail-end ultimately tells the true story as financial adjustments are made months and years down the road even though attention is diverted to current events.
Policyholder Impact
As of this writing, auto and home insurance is experiencing a dramatic tail effect from a confluence of rate increases, reduced coverage and more restrictions. It’s a form of the popular “shrink-flation” moniker used to describe groceries – a half gallon is no longer 64 ounces. Likewise, full coverage may not be anywhere enough or what it used to be as deductibles become higher, coverages dropped and policyholders avoid making claims. Fear of losing access to insurance or even the threat of higher premiums and surcharges, the Scarlet Letter of insurance, are the main reasons.
High insurance rates are no longer “news” even though consumers are gasping at continuous increases. However, an emerging pattern from underwriting actions and consumer behavior is a decline in reported repairable auto claims. In other words, policyholders are not making claims, foregoing repairs or dropping collision coverage. This is noteworthy and demonstrates the tail effect consequences not to mention downstream implications of self-funded or unrepaired damages.
Meanwhile, carriers are launching auto insurance products to offer “lighter” versions as part of their underwriting/product actions put into motion a while back. Allstate, for example is rolling out ASC (Affordable, Simple, Connected) which offers three main types starting with a budget savvy, bare bones choice. Essentially, less coverage designed to address rising premiums. Further, Allstate’s rental car reimbursement is now offered as a transportation expense in a flat dollar amount instead of typical 30 days and up to $40/day or $1,200 coverage. Instead, a flat $200, $400 or $800 sum is offered for about the same premium as the previous 30-day coverage. The tail effect of lesser protection at the same or higher cost is just beginning to be experienced.
Collision Repair Industry
During the pandemic, accident frequency plummeted as did demand for repairs. As accident rates rose sharply in 2022, already trending repair technician shortages became an even bigger problem. Repair cycle times elongated and drove repair costs further. Cost of technician labor pushed body shop expenses upward and MSO’s (Multi-Shop Owners) or consolidators applied newly found leverage on insurance carriers to raise estimate labor rates.
The collision repair industry is a critical part of the insurance claim resolution cycle and has been going through major change. Private equity funded consolidators have made major in-roads. With just over 30,000 U.S. professional collision repair shops, some 6,600 have been consolidated into multi-shop locations.
Meanwhile the influence of automobile technology and push towards OE Certification of shops demands additional investment in equipment, technology and more skilled labor. Insurers rely heavily on their branded Direct Repair Program (DRP) shop networks to provide repair services under cost controlling agreements. Once a claim is reported, insurers guide claimants to have damages estimated. Although image technology is making headway, 45% of claim damage inspection is performed by DRP’s per CCC Intelligent Solutions – a leading estimatics technology and information provider.
The tail effect of declining insurance repair work is rumbling through the repair industry and pressuring top line revenue outlook at a time when repair margins are being squeezed and higher investments needed.
Investors
Private equity investors play and important role in bringing capital and an alternative to an industry still made up of mostly independent shops. Consolidation offers the benefit of brand and consistency, appealing to consumers and insurers. Insurers benefit from negotiating and partnering with MSO’s which make up large portions of their repair networks. Collision industry consolidation has been steady over the past decade as an attractive investment target. A slow-down in repair volume may prove disruptive to future capital infusion as investors have choices and larger MSOs may pursue IPOs in pubic markets.
Accident Rates are another piece of the puzzle as frequency has stabilized and advancements in ADAS toward autonomous driving portend a future of fewer accidents – fewer although more costly repairs. The National Highway Safety Traffic Safety Administration (NHTSA) is requiring automatic braking standard in cars and light trucks by 2029 and continues to advocate for more ADAS consistency and efficacy. Others, such as Cambridge Mobile Technology are highly focused on reducing distracted driving and are making strides. Carriers and repair industry stakeholders have been watching all such developments for several years and recognize the long-view implications.
Additionally, sustained total loss rates of roughly 22% of reported claims are a part of the equation. In other words, more than 1 in 5 claims is automatically not fixed because damage amounts exceed repair thresholds and qualify as a total loss. Experts are watching closely as complexity of repairs, OE repair requirements, cost of parts and influences from more EV’s could push up total loss rates. Conversely, greater car loan debt drives consumer behavior and policyholders’ upside down in car loans may be reluctant to have their cars totaled. Per Edmunds, 1 in 4 owe more than their car is worth averaging $6,400 and 22% owe more than $10,000.
New Products and Solutions
As the insurance and repair space is reshaping, new products and new solutions can fill the void. Yelp, for example is well known for user reviews and connecting customers with businesses and services. Beyond restaurants and shopping, Yelp just announced acquisition of RepairPal for $80M to offer car repair estimates. Today, Yelp already helps consumers find body shops and greater demand from declining insurance claims is boosting demand for estimating costs outside of a filing a claim.
Photo estimating has found a home among insurers as an alternative method of auto damage inspection and is used regularly by insurers to start a claim. This same technology can be offered to consumers to similarly size-up and better inform decisions to make claims or not.
The door is open for gap protection and other services. Solving for total cost of car ownership; financing, insurance, maintenance and use has always been elusive. There have been several car subscription programs launched only to be discontinued. However, Volkswagen just announced Flex, a single monthly fee combining car, insurance, maintenance and roadside.
Embedded insurance models may also be a fit for gap protection and other out-of-pocket costs, distributed outside of a traditional insurance agency. Straightforward affordable protection alternatives would be opportune for embedded.
Parametric insurance is gaining in the homeowner space to protect for flood, earthquake, power outage and cyber. Such automatic payout insurance products could cross-over and help fill auto accident, out-of-pocket costs as well.
Conclusion
Like it or not the concept of insurance risk transfer is changing. Affordability is front and center and making trade-off decisions is daunting when gambling between no coverage or factoring a high deductible. All of which is reminiscent of how health care coverage and costs reshaped risk transfer in health insurance. How far it goes in auto and home remains to be seen. Carriers must balance profitability with growth and market share capture strategies in a highly competitive space and may possibly pull back on underwriting actions as rates restore profits. Thus far, there are no signs of such a reversal and the tail effect is just beginning to unfold.
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.
