Shifting gears in a changing landscape

The US motor insurance market (commonly referred to as Auto) generated USD 377 billion in premiums in 2023 and is the largest such market in the world.

After years of suboptimal results, the Personal Auto segment rebounded in 2024 due to a decrease in claims severity coinciding with rate increases to make up for hikes in repair costs and vehicle prices. The industry combined ratio for US Personal Auto dropped to 97% – 15 points below an all-time high of 112% just two years prior.

Commercial Auto, on the other hand, continues to suffer from the effects of litigation, escalated claims costs and reserving uncertainty, posting a 108% combined ratio in 2024 on a 10% increase in premiums.

The outlook for 2025 is for rate deceleration in Personal Auto due to increased competition and sustained social inflation headwinds for Commercial Auto.

2024 notwithstanding, the US market has suffered its worst results in generations (see figure 1). This is compounded by loss reserve deficiencies and unfavorable loss development since 2012 in Commercial Auto.

A number of underlying loss trends bear closer examination.

Economic, social and medical inflation are driving losses in US auto insurance. As shown in the graph below the cost of used cars, which is a proxy for total attritional claims inflation, rose rapidly in 2021 and 2022 according to the Manheim Index.

Although CPI inflation rates have moderated from the peaks seen in 2021 and 2022, repair costs remain high due to labor shortages, supply chain disruptions and advanced vehicle technology. A study by the American Automobile Association (AAA) found that advanced driver assistance systems (ADAS) can add up to 37.6% to the total repair cost after a crash.

Social inflation has also contributed to increased loss severity, fed by negative attitudes towards large corporations and the increase in attorney involvement. High profile litigation in the trucking industry has led the way yet commercial auto operators such as ride sharing companies and personal auto lines are also impacted.

At the same time, the cost of treating bodily injury claims has been exacerbated by medical inflation. Based on KFF's analysis of Bureau of Labor data since 2000, the cost of medical care has increased by 121.3%, which far exceeds the price of consumer goods and services, which rose by 86.1% in the same period. With rising drug prices, the adoption of advanced medical equipment, administrative overheads and increased labor costs, medical inflation isn’t likely to ease in the near term.

Although sales of Electric Vehicles (EV) in the US represent less than 1% of the 297 million vehicles in operation, those numbers are expected to grow as 38% of US adults consider an EV for their next vehicle purchase. This presents unique challenges for auto insurers because the average repair cost for EV is significantly higher – approximately 29% more than their gas counterparts due to labor costs, specialized components and complex technology.

Autonomous vehicles (AV) are also poised to make their mark and could be a game changer for the auto insurance market with the potential to reduce human error, which is the cause of 90% of traffic incidents.

Road safety is a topic of huge economic and social importance, according to the National Highway Traffic Safety Administration (NHTSA). 18,720 people died in motor vehicle traffic accidents in the first half of 2024, a reduction of 3.2% from the same period in 2023 and the ninth straight quarter of declines.

This reduction is welcome news and national safety campaigns will hopefully help address the increasing number of distracted driving and speeding violations.  

Despite improvements in road safety, though, claims severity continues to be a challenge. Bodily injury claims have risen 20%, largely due to social inflation, and so has severity as material damage increased by 47% in 2023.

Elevated tariffs imposed on auto parts imported from mainland China in 2018 contributed to increased claims costs for US auto insurers. The new round of tariffs on China, Canada and Mexico could cause supply chain challenges and delays which would drive up claims severity and the cost of replacement parts including windshields and airbags.

The Swiss Re Institute reports that estimated insured losses from natural catastrophes were on track to exceed USD 135 billion in 2024. The frequency and severity of extreme weather events is increasing, and the US auto insurance segment is impacted by hurricanes in Texas and Florida, hail in Colorado and wildfires in California, to mention a few. For example, Carfax, an auto data company, estimated as many as 138,000 vehicles experienced flood damage across six states from Hurricane Helene.

Regulation plays an important role in shaping the US auto insurance market, influencing pricing, coverage options and consumer protection. In Florida, tort reforms have resulted in a reduction in litigation related to auto glass repairs and eliminated one-way attorney fees. This has helped ease pressure on auto rates; however, at this writing lawmakers are considering several bills that could roll back some of the reforms in Florida's Property and Auto markets.