After three years of taking rate and leveling loss frequency, the insurance industry’s Personal Auto Liability (PAL) results look a lot better and seem to be moving in the right direction. The more urgent question for any carrier is: Can you say the same about your PAL book of business? We examine three differentiating factors underlying the actions and results, so you can consider what they mean to your specific auto book going forward.

Let’s start with a quick look at the big picture. A spike in auto claim frequency in 2015 caught some carriers off guard. Many responded with rate increases and revised underwriting guidelines. Early indications for 2018 are that these actions have paid off. The estimated Loss and DCC ratios fell to just under 70%.

This industry picture taken through year-end 2018 is reassuring, but the positive gap between premium and loss trend is closing, and early 2019 signs are that the gap no longer exists. Carriers shouldn’t be lulled into thinking that the PAL problem is solved, or they will miss the slowly emerging impact of trend, rate and other factors on results.

Here are three of the many challenges we help carriers think through:

1. Continuing Severity Trend - While loss frequency is relatively flat, we see loss severity trend averaging close to 4% and combined frequency and severity trend at 3.5%. The major contributors - higher incidence of litigation, cost shifting, medical costs and higher repair costs - are not going away anytime soon. Even with recent rate and underwriting actions, what will your loss ratio look like in two to five years?
2. Wide Variation in Company Results - The large specialists and direct writers can better identify and more quickly respond to trends by segment than the rest of the PAL market. That goes a long way toward explaining the 10-point spread we see in loss ratios between these groups. It also means that smaller companies tend to rely on less frequent, high level rate actions that can miss the mark and prove inadequate. Top industry performers are also able to more quickly recognize prior year reserve adjustments, while many have a continuing struggle with adverse development.
3. Blunt Rate Increases and Effective Rate Change - A broad brush rate increase can and will change the mix of your book. A portion of preferred accounts could leave and be replaced by less profitable drivers and territories. The effective rate change after a 10% filed rate increase would be significantly reduced after factoring in the higher loss experience. Your book has a different profile than it did before the rate action, and that profile may not align with company goals.

Personal Umbrella writers face these same challenges. Close to 90% of Personal Umbrella losses are from auto, and this relativity has been remarkably stable over the years.

These factors do not render rate and underwriting actions incomplete or unsuccessful. The insurer changes addressed a serious problem and helped close - or at least narrow - a large gap between loss and premium trend.

The point is that continuous efforts are needed to stay on the path to profitability and prevent that gap from returning. There are proactive steps you can take:

How will your PAL book be performing in the years ahead? To talk more about PAL and other insurance industry issues and trends, just contact us.