Auto Zone: State of the Market

With an auto policy, it doesn’t matter if it’s a $5 increase or a $500 increase—“if it’s an increase, people are complaining,” says Mike Crowley, vice president, Crowley Insurance Agency, Inc. in East Syracuse, New York. “And as the agents, we get the brunt of it.”

He understands where auto carriers are coming from: “It’s just the way the world is nowadays. It’s very rare to run into a clean risk, where the individual or the household doesn’t have something on their record, and it’s hard for a homeowners premium to offset these things so the carrier can still make money.”

But like most independent agents, Crowley also knows it’s never easy being the middleman. In 2018, he saw personal auto carriers non-renew insureds far more frequently than they did in the early part of his career.

“They could be looking at it on a small-picture basis, where a risk might qualify underwriting-wise, but the person’s only been a client for two years,” Crowley says. “They’re thinking, ‘For a $1,200 premium, we’ve already spent $25,000 in claims—it’ll take 20 years to catch us back up.’”

And if the personal auto insurance market is tough, commercial auto paints an even gloomier picture. What’s responsible for rate hikes on both sides? Will the market continue to harden? And how can you solidify your role as a trusted adviser in a line that’s rapidly becoming unrecognizable?

THE 5 CULPRITS

According to James Lynch, chief actuary, vice president of research and education, Insurance Information Institute (III), five main factors are responsible for rising frequency and severity in the auto market:

1) More miles driven. Not surprisingly, the number of accidents is directly related to how much people are driving. “When you go into a recession, a lot of people get laid off, and when people get laid off, they don’t drive,” Lynch says. “A car that’s in the garage isn’t really exposed to accidents as much as a car that’s out on the highway.”

When the economy turned around in 2014, “we started to see more miles being driven countrywide, and that correlates strongly with an increase in claims frequency,” Lynch says.

2) Legalized marijuana. In Colorado, Nevada, Oregon and Washington, where recreational marijuana is legal, collision claims frequency is about 6% higher, according to 2018 research from the Insurance Institute for Highway Safety and the Highway Loss Data Institute.

The studies compared the frequency of collision claims per insured vehicle to the control states of Idaho, Montana, Utah and Wyoming, based on collision loss data from January 2012 through October 2017. Analysts controlled for differences in the rated driver population, insured vehicle fleet, mix of urban versus rural exposure, unemployment, weather and seasonality.

Although recreational marijuana is currently legal in only nine states, medical use is legal in 31 plus Washington, D.C., and more states are expected to follow suit in the years ahead.

Why is that such a big problem for the auto insurance industry in particular? Unlike alcohol, “where the amount of alcohol on your breath is a pretty good proxy for the amount of alcohol in your blood,” Lynch says, there’s not yet a reliable method for testing whether someone is high behind the wheel.

“Legislators and taxpayers need to understand that legalizing marijuana is not free money cascading down from heaven,” Lynch cautions. “It is a public policy choice, and there’s a downside: There will be more accidents, and your insurance rates will be marginally higher, and people will die and be injured because of the legalization of this drug.”

“Those types of choices happen all the time in public policy,” Lynch adds. “We just point out that this involves choices, too.”

3) Distracted driving. Nearly 80% of vehicle crashes involve driver inattention, according to research conducted by the Virginia Tech Transportation Institute.

Although eating and drinking, talking to a fellow passenger, applying makeup, programming a GPS or navigation system, or simply adjusting the radio all qualify as distracted driving, using a cellphone is undoubtedly the biggest concern: According to a study conducted by Cambridge Metrics Telematics last year, phone distraction occurred in 52% of trips that resulted in a crash.

“With the development of smartphone technology, distracted driving is clearly on an increase, although it’s tough to quantify and measure,” Lynch says.

And it’s perhaps an even greater concern in commercial auto than it is in personal, says Art Seifert, president of Glatfelter Program Managers, a division of Glatfelter Insurance Group.

“Because of the rise of internet sales, you have more 18-wheelers on the road than ever before. And because trucking companies are having a very difficult time recruiting new drivers, you also have younger, less experienced drivers behind the wheel,” Seifert points out. “Combine those facts with distracted driving, and you have a very lethal combination.”

4) Higher speeds. Throw in the fact that people are driving faster now than they ever did before, and the situation becomes even more dire. Quite simply, “speed kills,” says Lynch, who notes that speed limits have been increasing for four decades, particularly during the recent recession.

Consider a highway with a speed limit of 70 mph that used to be only 55 mph. “Most people are driving about 75-80 mph, and if you do the math on that, that means you’re driving 40% faster,” Lynch points out. “When you have an accident, the force that’s expended in the accident is proportional to the square of the speed.”

The square of 1.4, or 40%, is basically 2, Lynch explains—which means “the force generated by the accident has doubled,” he says. “Even though we make cars safer today, you can’t get past that problem.”

5) Increasing repair costs. Safer cars themselves are responsible for the final factor. Crowley says claims that used to be $3-4,000 are now $10-12,000. “Minor fender benders are causing significant damage dollar-wise to multiple vehicles,” he observes. “Today’s cars keep you safe in a bubble in the middle, but they’re basically plastic, and they’re just folding up like accordions.”

“There’s a lot of technology to help prevent accidents nowadays, but when they happen, they’re so much more expensive to repair,” agrees Doug Fairbanks, a commercial auto agent at Hartland Insurance Agency, Inc. in Hartland, Michigan. “If someone drives into the front of your car and rips the bumper cover off, 10 years ago that would have been a $500 repair. But if you have an electric vehicle and the charging brain for the car is mounted to the bumper cover, that turns into thousands of dollars.”

Repair costs correlate directly with not only the sophistication of a vehicle’s technology, but also where that technology is located. “If you have sensors, they’re probably along the perimeter of the car,” Fairbanks points out. “That’s what gets hit in small accidents.”

In the event that an accident damages a sensor, repairs will involve not only replacing that sensor, but recalibrating it, Lynch adds—and then, “you have to run diagnostics because of all the computer code within the vehicle,” he explains.

Consider this: Whereas a Boeing 787 has 7 million lines of code and Facebook has 60 million lines of code, a 2016 Ford F150 has 150 million lines of code. “Whenever you have an accident, you have to scan all the electronics before and afterwards, and all those costs keep increasing,” Lynch says.

Then again, the average vehicle on the road in the U.S. was 11.6 years old in 2017, when only about 5% of the fleet incorporated driver assist technologies like automatic braking and lane departure sensing, according to Progressive. But the increasing cost of auto repairs doesn’t depend solely on the kind of tech that will eventually become standard in autonomous vehicles

“Driverless technology is a good example of the increasing complexity, but it’s not just that. Everything about the way vehicles are built is more expensive—even the sound system or the door,” says Lynch, who notes that an automatic door in a minivan could cost up to $3,000 to repair.

Increasing claims severity is a persistent auto insurance pattern that III has tracked going back 50 years. Whereas accident frequency goes down about half a percent a year on average, “the long-term trend for the cost of a claim is to go up considerably faster than the rate of inflation,” says Lynch, who cites III data showing that between 1963 and 2013, the average size of an auto property damage claim increased a shocking 1,666%.

“It’s enormous, and bodily injury follows similar trends,” Lynch says. “There’s no reason that trend should stop—it’s been going on for 50 years. It’s because autos get safer, we do a better and better job of protecting ourselves, but doing that costs more money.”

PRICING TRENDS

As a result of all of the above, personal auto pricing has been on the rise since 2015, according to Amy Shore, president, Property & Casualty Sales and Distribution for Nationwide.

But data from the National Association of Insurance Commissioners and III suggests that results for personal auto carriers “seem to have turned the tide,” says Lynch, who notes that the combined ratio for personal auto dropped from 106 in 2016 to 103 in 2017.

“For the first two quarters of 2018, it went down another two or three points,” Lynch adds. “That doesn’t necessarily mean the industry is at a point where it’s making a reasonable return on the equity it’s invested, but it is getting better. It’s going in the right direction.”

Shore agrees, predicting that although personal auto rate increases are likely to continue, they will likely be “smaller increases than we have seen in the past few years.”

It’s a different story for commercial auto, where Lynch says combined ratios climbed from 110 in 2016 to 111 in 2017, then “up another point or two” in the first two quarters of 2018: “Double-digit increases in commercial auto books are common.”

“The commercial auto industry hasn’t generated an underwriting profit since 2010,” says Eric Smith, senior vice president, Property & Casualty Commercial Lines for Nationwide. “We should expect rate increases in commercial auto to continue in 2019 and beyond until results improve and rate indications come down.”

And that’s not likely to happen anytime soon. In 2018, Seifert has observed 6-9% rate increases for what he considers good accounts, and 15-20% hikes for others.

“For bad accounts—those that have had real issues—it’s whatever the market will bear,” Seifert says. “I’ve seen rates go up as much as 50% in states. Most insurers are not looking to write commercial auto. They’re going to get their price, or they’re going to walk away.”

Fairbanks points out that “it doesn’t even have to be a bad risk.” One of his contractor clients—who “had good credit, didn’t have claims, no driving history problems,” he says—recently leased two new Dodge pickups. “It was $5,000 a year for those two trucks, and that was our best option. The rates were even higher with other companies. That’s something I can’t explain.”

Although pricing for fleets is a bit kinder—Fairbanks cites a gravel train that was able to secure $1 million in liability, plus comp and collision, for just $600 a year—commercial auto pricing overall is “frustrating for the clients,” he says. In the contractor’s case, “that’s basically another used vehicle that he probably had not budgeted for at the time of his purchase.”

In addition to contractors, Fairbanks says the market is hardest for “intensified retail delivery” clients—“especially the hired and non-owned auto portion of pizza delivery shops,” he says.

But long-haul trucking is by far the “toughest” commercial auto sector, according to Richard Kerr, MarketScout CEO. Insurers in the space have “just been killed on loss experience,” he says. “It’s pretty simple—if you pay out 140 in claims and you collect 100 in premium, that’s not good. Most carriers have been really suffering from that. Everyone’s struggling with how to get it right.”

RISK MANAGEMENT

For many commercial auto carriers, that means focusing on driver training programs and technology-based risk management solutions that track driver behavior and reduce liability exposures.

Earlier this year, Munich Reinsurance America teamed up with eDriving, a provider of online driver training and global driver risk management, to offer companies with commercial fleets access to eDriving’s smartphone-based telematics program Mentor®. The program combines a client’s collision, motor vehicle report and telematics data with behavioral science and advanced micro-training to help identify and remediate risky drivers and behaviors.

Similarly, Heather Day, general manager, Agency Distribution at Progressive, notes that the company recently launched Smart Haul—a usage-based insurance program for commercial truck drivers, which offers those who qualify a minimum savings of 3% on their initial commercial auto period simply for signing up and sharing their driving data.

And Nationwide has plans to incorporate a similar program in order to offer premium savings alongside “valuable fleet management services and insights,” Smith says.

While Fairbanks says his agency has always focused heavily on hiring and checking MVRs for commercial auto clients, recent developments in telematics “can give live reports to owners about how their drivers are operating,” he says. “Things like that give the underwriter a lot more comfort in adding credit or other incentives to be able to bring the rates down from where we’re starting.”

Regardless of what kind of training program commercial auto insureds have in place, “underwriters are looking for those, and they’re looking for real driver selection criteria,” Seifert says—which means as an agent, it’s important to tell clients, “you better start getting some risk control religion if you want to be able to control your cost of risk transfer over time.”

The concept of tying rates to actual driving habits “resonates strongly with customers” on the personal lines side as well, observes Shore, who notes that UBI programs “give customers more control over their rate level.”

“Whether you’re comfortable with it or not, UBI is probably going to end up in the car anyway,” predicts Jean-Marie Lovett, president of MassDrive, a Boston-based independent insurance agency, and Bindable, a technology firm that supports insurance companies and their consumers. “Direct writers are pushing price, price, price. Understanding UBI is going to be very important for agents, because being able to point out the nuances between one policy and another is what gives them value.”

YOUR ROLE

In the personal auto market in particular, adding value and competing with directs and InsurTechs [see sidebar] will require significant adaptation in the years ahead.

“It’s certainly something that a good businessperson can do, and most agents are good businesspeople,” Lynch says. “The important thing is to acknowledge that this is the period in which you need to be thinking about these things, because 10 years from now, you don’t want to look up and go, ‘Gosh, remember when? Suddenly everything changed, and we didn’t even realize it was happening.’ That’s the thing agents always have to avoid.”

How? Utilizing the self-service tools provided by your carrier partners is a great first step, whether that means 24/7 access to policy information, e-signature packages, mobile apps or text-to-pay options.

Then, “the brochure website is not going to last—we’ve got to get beyond that,” advises Lovett, who says that in order to be relevant to personal lines consumers, agents must invest in a mobile-responsive website as a bare-minimum first step. “Everybody is starting their insurance experience on a phone first. If you’ve got a website that doesn’t translate, that’s not a good first impression.”

Broadening your agency’s communication methods to include chat and texting features is another way to deliver what personal lines clients expect. “Those tools are pretty available now through a lot of different third parties and agency management systems, and they need to be available on a smartphone so that if your customer is at the dealership on a Saturday afternoon and wants to buy that car, you can help them,” Lovett points out. “If you can’t, they’re going to go to the direct writers that can.”

“Communication is where agents are going to lose,” Crowley agrees. “If you’re not communicating with your client the way they want to be communicated with, that’s going to leave a sour taste in their mouth. They’re going to sit there and go, ‘I could just go to GEICO, or I could just go to Lemonade, or I could eventually go to Amazon Prime and buy this when I buy my paper towels.’”

And that emphasis on proactive communication should go hand in hand with a commitment to client education around why personal auto insurance is not the commodity many consumers believe it to be [for more on this topic, keep an eye on IA’s e-newsletters this month].

“As much as everyone talks about this, the biggest thing is that you can’t sell on price,” Crowley says. “You have to figure out how to present your quotes and proposals in a way that doesn’t make price the star.”

Imagine you’re able to save a client $1,000 on their auto policy. “No matter how I present a $1,000 savings, you are going to switch,” Crowley says. “But if I go through all the coverages and explain the differences, and then at the very end I say, ‘Oh by the way, this is $1,000 savings, too,’ now I’ve sold you on the fact that you’re getting better coverage. The savings is just a bonus.”

Crowley refuses to give apples-to-apples proposals for exactly that reason. “I want to take all decision-making ability away from the insured,” he says. “I don’t want them to think, ‘Hmm, I save another $50 a year if I go to the 100/300 option, instead of the 500 I did have,’ because if they’re only thinking on price, that means they’re buying on price, and they’re going to leave on price.”

“If you switch things around and present yourself as the adviser, you’re going to get a customer who values the fact that you gave them those extra coverages,” Crowley adds. “Every single time, your client’s going to think, ‘You know what’s great? Mike gave me all this extra coverage, and he still saved me money.’ That’s how you train clients to value what an independent agent does.”

Jacquelyn Connelly is IA senior editor.

Slim Chances

When MarketScout launched its InsurTech venture fund MarketScout InsurTech (MIT) late last year, it committed $25 million in initial funding from MarketScout Corporation to focus on investments in tech-enabled insurance distribution.

Because each startup “only requires around a $1-million investment,” says Richard Kerr, MarketScout CEO, MIT planned to fund about 20 builds.

“So far, we have sourced about 400 deals,” Kerr says. “We’re probably going to do three.”

Why so few? “There’s a lot of interesting new technology, but you have to marry the technology with an understanding of insurance,” Kerr explains. “Many of these InsurTech business plans forget that every state has a different regulator, and that there’s compliance and licensing and admitted versus non-admitted—most of them just don’t get it.”

Mistaking insurance for an “easy game,” Kerr says, “is what blows up a business plan. Sure, there are some interesting new auto initiatives out there, but they’re not ready for primetime.”

“We’re seeing more deals than you can imagine, and 90% of them are trash,” Kerr adds. “But you go through what you can and try to keep learning. It’s just like the dot.com era. You’re kissing a lot of frogs.” —J.C.