In a recent analysis of ISO’s 1Q23 FastTrack private passenger auto loss data, industry experts have identified significant volatility in year-on-year severity changes and above-average trends in certain states as the primary drivers behind insurers’ struggles to interpret the current loss environment accurately.
However, amidst these challenges, there are positive indications that overall loss trends are normalising, leading to optimism that steadily compounding rate increases will eventually result in adequate rates and returns for insurers.
The data revealed that loss cost inflation remains high, with paid loss-weighted trends rising by 10.0% year-on-year for all auto sublines, except the particularly volatile comprehensive subline (+12.4% including comprehensive).
These figures significantly surpass the 20-year pre-COVID average of +2.2% and the previous high recorded in 3Q15, which stood at 9.1%.
Experts noted that despite the still-high loss trends, the figures represent a reversion towards historical norms. However, many insurers with significant personal auto portfolios have faced worse-than-expected profitability this year, and the industry has generally underperformed compared to the S&P 500.
Analysts believe that several factors contribute to insurers’ challenges, including an unusual increase in frequency trends in 1Q23, which rose by +3.3% compared to the previous quarter’s +2.6%.
Notably, the fact that frequency rose year-on-year is considered quite uncommon, as it had fallen in 54 out of 80 quarters between 1Q00-4Q19.
Another critical observation was the greater deviation of recent year-on-year severity changes from their long-term averages when compared to frequency changes. Insurers tend to emphasise responsiveness when frequency fluctuates, but stability when severity fluctuates, potentially leading to a risk of overlooking persistent severity changes.
Despite these complexities, analysts maintain a positive outlook for personal auto insurers in the long run. The data points to a normalisation of loss trends, which should gradually be absorbed by steadily compounding rate increases, and likely even accelerating ones. This positive perspective remains, despite short-term uncertainties related to reserves and weather.
In conclusion, while insurers face challenges in accurately quantifying current loss trends, the overall trend normalisation offers hope for a brighter future. As the industry anticipates compounding rate increases, insurers remain optimistic about achieving rate adequacy and stable returns in the long term.
