Financial services ratings agency, Fitch Ratings, believes that commercial re/insurers underwriting profits within the personal auto line have had a dramatic increase after a reduction in driving has led to lower claims frequency in the first half of 2020.
According to Fitch, this has helped to offset higher incurred losses which are related to the ongoing COVID-19 pandemic in multiple segments, ranging from business interruption to professional liability and workers compensation.
Ultimately, this has meant that virus-related effects on consumer behaviour have had a positive impact on first-half 2020 auto insurer earnings.
Despite the current positive impact, Fitch claims that it is unsustainable and they expect profit challenges in the future as regulatory and competitive pressures are looking to hinder any rate increases when losses return to historical norms. They also noted that the timing remains uncertain, frequency of claims will eventually move toward traditional levels, and loss severity moves perennially upward for auto insurance.
1H20 personal auto results for eight publicly traded insurers that disclose product results in GAAP reporting showed a 6.5 point decline in the segment combined ratio to a highly profitable 85.5%.
Information from three major personal auto writers (Allstate, GEICO and Progressive) indicate that claims frequency dipped by approximately 30% at mid-year 2020 for physical damage and bodily injury claims, while loss severity is up by around 10% or more for these classes of business.
Net written premiums for this group dipped 2% for the six-month period relative to the prior year. Underwriters have responded to this recent reduction in risk exposures by offering returns of premium, renewal price rebates, and policyholder dividends, adds Fitch.
The ratings agency estimates that these actions totalled approximately $12 billion to date and will grow further throughout the year.
For accounting purposes, most of these premium adjustments will be recognized in future results. Still, the claims benefits from frequency reductions significantly outweigh the value of any premium reductions. Underwriters’ regulatory rate filings widely portend further premium reductions in the near term, which will lead to further industry auto revenue declines.
In March, Fitch affirmed the U.S. P&C and global reinsurance Rating Outlooks at Stable, given the capital strength for the vast majority of insurers to withstand the pandemic fallout. However, we moved our fundamental sector outlook to negative on weaker profit fundamentals and an expected decline in investment and operating performance.
