Auto insurers are embarking on a ride into the unknown as motorists clock record mileage on U.S. roads and insurer underwriting results start to reflect a surge
in driving. The Great Recession of 2008
pushed mileage downward as never before,
until driving started to rebound and the
negative trend reversed in 2012. Today, an
improving economy and falling gas prices
have more people driving more often.
Miles driven set new records in 2015,
and seasonally adjusted mileage continues
to increase. Americans drove a combined
3. 2 trillion miles during the 12 months
leading up to July 2016, according to the
U.S. Federal Highway Administration.
But this sign of economic recovery car-
ries a downside for road safety in general
and for auto insurers in particular. At
Berkshire Hathaway’s 2016 shareholders
meeting, Chairman and Chief Executive
Officer Warren Buffett was asked about
GEICO’s declining financial performance.
In response, Buffett pointed to frequency
and severity of claims rising “quite sud-
denly and substantially” in 2015.
In strong correlation with the spike in
mileage (see Figure 1), accident frequency is at a 10-year high, having risen
steeply in 2014 and 2015. This in turn
may shrink auto insurers’ margins. Verisk
Analytics examined two common types
of property damage loss — liability property damage and collision physical damage — and found that for both categories
the rise in frequency tracks closely with
the increase in miles driven.
Figures 2 and 3 show that property
damage frequency climbed to 3.59 percent in the first quarter of 2016, while collision frequency was 5.95 percent. Many
auto insurers found that the recession and
the resulting drop in miles driven, which
persisted through 2011, drove average
frequency almost 0.19 percent lower than
today’s rates for property damage and
0.34 percent lower for collision. This dip
in frequency — combined with lowered
severity — was multiplied across millions
of policies and helped insurers keep premium increases relatively flat in a competitive market, according to data from
Fast Track Monitoring System.
During the recession, depressed auto sales
led to aging of the nation’s vehicle fleet,
Auto Claims Face a
Bumpy Road Ahead
By John E. Cantwell and Dorothy E. Kelly