Why Auto Insurance Rates are Likely to Increase in 2018
If you thought your auto insurance rates increased an unjustifiably high amount in 2015, 2016 and 2017, there isn't much good news for you for 2018. Auto insurance companies posted another year with slim-to-negative profit margins due to an uptick in costly car accidents and disastrous storms. The likely result will be more rate increases in the coming years — even for excellent drivers.
Why are auto insurance rates continuing to climb?
Like any business, auto insurance companies need higher revenue than expenses to stay viable. They make money from customers' premiums but lose money when they fulfill their obligation to pay for damages. They also have many operating expenses to pay, including agent compensation and advertising.
The proportion of expenses to revenue is called the "combined loss ratio," and whenever it is above 100%, the company loses more money than it is earning. In 2016, only two of the top 10 largest auto insurance companies in the country had combined ratios below 100% — and just barely.
Company | Premiums written ($B) | Premium increase since 2015 | Combined loss ratio 2016 |
|---|---|---|---|
| State Farm | 39.19 | 7.25% | 117% |
| Berkshire Hathaway | 25.13 | 11.94% | 99% |
| Allstate | 20.81 | 3.88% | 100% |
| Progressive | 19.63 | 12.08% | 96% |
|
USAA | 11.69 | 10.69% | 107% |
| Liberty Mutual | 10.76 | 8.18% | 109% |
|
Farmers | 10.30 | 3.19% | 111% |
| Nationwide | 7.64 | 2.30% | 114% |
| American Family Insurance | 4.01 | 8.43% | 109% |
| Travelers | 3.90 | 15.38% | 105% |
Source: SNL Financial
So, even if you have never been in an accident, your rates may still go up, because companies are trying to bring their ratios below 100%. Imagine a major drought destroying part of a farm's crops and then the farm charging more for the crops that survived in order to make up for the ones they lost. It's the same principle with your auto insurance.
In 2010, the situation was the exact opposite. Only two of the top 10 companies were operating with combined loss ratios over 100%. The average combined loss ratio was 99.7% in 2010, compared with 107.1% in 2016. The average combined ratio has climbed year after year, and as a result, auto insurance rates have gone up an average of 20% across the country.
Unfortunately, the rate hikes have not been effective at closing the gap between profit and loss. All the insurance companies in the above table increased their written premium revenues in 2016 (mostly due to rate hikes), yet they still (with the exception of Allstate) ran higher combined loss ratios. The current trend indicates that the companies are getting further from turning underwriting profits again. Even after three solid years of increases, the companies are not just still losing money but losing an even greater amount.
Why are auto insurance companies losing so much money?
In their financial statements, Geico, Progressive and Allstate didn't hesitate to blame bad weather as a significant source of their losses. In their financial statement, Progressive said catastrophe losses as of the end of the third quarter were "$121.0 million greater than in the same period last year." They attributed $85 million to Hurricane Matthew alone.
Comprehensive claims, which may result from catastrophic weather, can average upwards of $1,700 per claim, according to the Insurance Information Institute, so those figures make sense, given the number of people that could be affected by a hurricane. The floods in Louisiana, which were also cited in financial statements, also ended up costing insurance companies millions of dollars.
But it's not just the weather. Drivers are crashing more now than they have in nearly a decade. The National Safety Council, a nonprofit organization that advocates for safety, found that fatal motor vehicle accidents went up 6% from 2015 to 2016, for a total of 40,200 fatalities — the most since 2007. The National Highway Traffic Safety Administration blames distracted driving due to texting as a large source of the increase in fatalities.
More disasters and more accidents lead to more claims and more insurance payouts. In 2017, the number of households with at least one auto insurance claim in the previous three years increased by 3,869,969, compared with 2014. In 2017, 22.2% of households had at least one auto insurance claim, while 20.5% had one in 2014. Nielsen, which compiled the data, projects that in 2022, 22.5% of households will have at least one auto claim.
How much will car insurance cost in the future?
It's difficult to pinpoint future auto insurance pricing with certainty. What you could pay for auto insurance in the near future is likely more than what you are paying now, even if you have a clean driving record.
The trends that are causing more accidents — lower gas prices leading to more drivers on the roads, drivers distracted by texting and so on — are not likely to go away. Other important factors, like severe weather, are difficult to predict.
Colorado State University Tropical Weather & Climate Research has forecasted this hurricane season to be below average in terms of the number of named storms. They cannot predict, however, how many of those storms will hit the US. So, even if the total number of hurricanes is below average, if the number that hit the US is above average, the property damage costs would be enormous and an even heavier burden on insurance companies.
On the other hand, if the weather turns out to be favorable, or another factor discourages people from driving, companies may start to see better margins and feel no need to raise rates further. Again, it is all speculative, and only time can tell.
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