Motor insurance claims are on the rise
In May 2017, the International Accounting Standards Board (IASB) finished its long-standing project to develop a new international accounting standard for insurance contracts.
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Underwriting results in US motor, in both the personal and commercial segments, have deteriorated in the last couple of years, and insurers have increased rates to catch up with rising claims costs. The surge in loss costs has been due to higher frequency and severity of accidents. Between 2014 and 2016, after decades of decline, US traffic fatalities surged by 14%.1 With stronger employment growth and low gas prices, people have been driving more.2 There has also been an uptick in speeding and drinking, but these factors alone do not explain the surge in road deaths. Arguably, a main contributing factor is distracted driving, given a substantial increase in smartphone use by US drivers while at wheel. In a study of 3 million people, Zendrive, a San Francisco start-up which analyses smartphone data, found drivers use their mobile phone during 88% of trips.3 The negative impact gets compounded by changes in the use of phones on the road. Texting, Twitter, Facebook and Instagram — all activities that require additional attention away from the road – are replacing voice calls.
Motor insurance combined ratios in select markets, 2007-2016 
There has been a notable increase in loss frequency for trucking accidents in the US, which is related to a shortage of experienced drivers. The return of economic growth after recession created demand for drivers, which has been satisfied by the hiring of drivers with less experience. Heavier trucks, higher road density, higher speeds and distracted driving has contributed to the spike in loss severity. Further, victims in truck accidents are often injured much more severely than in car accidents, and this is leading to increasingly larger jury verdicts in bodily injury cases.
Since 2012, adverse loss development in US commercial auto liability has contributed to elevated combined ratios. Commercial business was under-priced in the years immediately following the financial crisis. According to data from Conning, the estimated average claim size rose by 39% between 2006 and 2015, while commercial auto rates fell by 18%. Claims severity (ie, average claims costs) for personal auto lines has also surged. Strong auto sales have seen many older vehicles replaced with newer ones that are more expensive to repair. The increasing complexity of newer vehicles – including the proliferation of safety technology - is adding to the costs of car repairs.
US personal and commercial auto pricing has been increasing since 2015. It averaged around 7% in 2017 for personal auto (based on the consumer price index), and around 6% for commercial auto (based on the Council of Insurance Agents & Brokers (CIAB) survey), with no signs of moderation. Profitability should be improving at this pace but there is still a long way to go before lost ground is made up.
In Europe, underwriting profitability in motor has also developed negatively over the last few years due to increasing severity, not frequency. Unlike in the US, claims frequency in Germany, the UK, France and Italy has remained – with little deviations up or down – mostly stable. This contrasts to the decade before when claims frequency rates declined steadily in all of the analysed markets. A similar picture is drawn by the European transport safety council. After years of around 5% annual decline, the number of road fatalities has stabilised at around 26 000 since 2013. "For every death on Europe's roads there are an estimated four permanently disabling injuries such as damage to the brain or spinal cord, 8 serious injuries and 50 minor injuries".
Claims severity in Europe continues to increase, based on rising healthcare and car repair costs. Increasing penetration of advanced driving assistance systems is expected to reduce claims frequencies over time. However, expensive sensor technology increases repair costs for minor collision accidents, driving up claims severity.
- US Department of Transportation, National Highway Traffic Safety Administration.
- US Department of Transportation, Federal Highway Administration.
- Largest Distracted Driving Behavior Study, Zendrive, 17 April 2017, http://blog.zendrive.com/distracted-driving/
- Road deaths in the European Union – latest data, European Transport Safety Council, http://etsc.eu/euroadsafetydata