Like other auto insurers, State Farm may be forced to raise premiums as the frequency of crashes continues to rise.
A massive $7 billion loss in State Farm’s auto underwriting business may push the insurer to raise its premiums even higher than they already are.
In an article for Bloomberg, Barclays analyst Jay Gelb wrote that that State Farm’s “highly unprofitable auto insurance results should provide further room for the industry to raise auto insurance rates. Improved pricing should eventually lead to better auto insurance underwriting margins, which have been negatively affected by increased claims cost inflation.”
State Farm is not an outlier as far as auto insurance losses go, however. Following a recent trend of increasing auto accident frequency, Travelers Cos., Geico, and Allstate Corp. have all seen auto losses and raised premium rates accordingly. Additionally, as another Bloomberg article notes, auto insurers have paid $1.05 to cover claim costs for every $1 in premium revenue earned over the past few years. But what’s driving this industry-wide trend?
What’s Causing Auto Premiums To Increase?
Many industry experts place the blame for surging premiums on a recent spike in the number of cars on the road — after all, the more cars there are on the road, the more likely accidents will be. It’s not just the case that there are more drivers today than there were in recent years, however. A bevy of new digital distractions is undermining safe driving practices nationwide. “When we look at smartphone ownership statistics and smartphone use and compare that to accident frequency, the correlation is striking,” Allstate President Matt Winter told the insurer’s investors.
In addition to these factors, the cost of repairing vehicles has continued to increase as automakers manufacture more and more high-tech cars. “Where a normal repair 10 or 15 years ago from an accident cost $1,500, now that same bumper with all the technology is $3,500,” President of Kulchin Ross Insurance Services Derek Ross explained to Bloomberg. “The insurance companies are absorbing those real dollar claims while trying to figure out how much of this automation and technology is actually working to their benefit.”
Rough Waters For State Farm
This underwriting loss is particularly acute for State Farm, since 63% of its combined net written premium traces back to auto lines. Though earned premium grew 6.9% to $38.8 billion from 2015, incurred claims and loss adjustment expenses reached $35.8 billion, which suggests that the insurer experienced a substantial hike in claim payouts that counteracted the increase in revenue.
The 2016 auto underwriting loss follows a recent string of unfavorable developments for the insurer. Last year, California's insurance commissioner ordered State Farm to reduce its rates for homeowners and renters by 7% and refund more $100 million to its policyholders — and in September, a U.S. District Judge in Illinois authorized class action status to a lawsuit filed by 4.7 million State Farm auto policyholders.
The case dates back to 1999, when the plaintiffs alleged that State Farm forced policyholders to purchase lower-quality auto parts when their cars required repairs. A jury ruled in the plaintiffs’ favor, but in 2004, the Illinois Supreme Court reversed the decision with Justice Lloyd Karmeier casting the swing vote. The class action suit alleges State Farm funnelled money into Karmeier’s campaign to sway him to overturn the $1 billion award.
There is one nugget of gold for State Farm at the end of this mountain of bad news, however. Its combined net worth grew to $87.6 billion this year due to a $4.2 billion boost from its U.S. equities investment holdings, up from $82.7 billion in 2015.
How To Explain Premium Hikes To Your Clients
Given the recent uptick in accident frequency and the accompanying rise in underwriting losses, auto insurers will likely raise premiums (if they haven’t done so already). So, prepare your clients for the prospect that they may have to pay more for auto insurance in the near future. If an individual client drives infrequently or tends to display low-risk driving behavior, you may want to recommend that they investigate policies or rewards programs which leverage telematic devices, which monitor driving behavior and are often offered in tandem with a premium discount.