Personal auto insurers had a year like no other in 2020, and when 2021 is through, it may be another year without precedent—but in very different ways. In Part 1 of this series, we unpacked 2021’s new normal for mileage and explored road-travel trends affecting the segment. Now, we continue to unpack 2021’s new normal in terms of growth, profitability, claims, and even safety. Our analysis finds further trends simultaneously at play, sometimes contrasting but equally impactful.
The pandemic’s true impact on the size of the 2020 personal auto market may have exceeded 6.5 percent.
Market contraction—and now expansion
Last year, government-mandated lockdowns reduced exposures and premiums as people drove less, traffic was lighter, and consumers bought fewer cars. Much of the premium reduction reflected the policyholder refunds, rebates, and dividends insurers issued. Adjusting direct written premiums (DWP) for related special policyholder dividends and for refunds booked as underwriting expenses, the industry market size dropped by 3.4 percent.1 But the pandemic’s true impact on the size of the 2020 personal auto market is revealed in comparison to the organic growth that did not happen: Measuring against a normal growth scenario without COVID-19, the real hit to aggregate premiums may have exceeded 6.5 percent.2
But the growth outlook should differ significantly in 2021.
Growth potential for 2021: New car sales and the supply chain
Pent-up demand from a sluggish 2020 led to an explosion in auto sales in the first part of 2021, but growth has slowed from June and will likely remain suppressed through the rest of the year amid a continuing shortage of new-car inventory, largely driven by the shortage of computer chips today’s cars use to manage increasingly complex electronics. J.D. Power puts U.S. auto sales for the first half of 2021 at 8.4 million units, up 32 percent from the first half of 2020 but a modest 0.7 percent increase over the first half of 2019.3
Thomas King, president of the data and analytics division at J.D. Power, said in the forecast, “The effect of fewer vehicles in inventory at dealerships [will] have a material effect on aggregate industry sales volumes.”4
"If shoppers can't find the product they want, a sale can't be made," said Charlie Chesbrough, senior economist at Cox Automotive.5 Cox forecasts full-year 2021 volume of 16.5 million, up from 14.6 million in 2020 but short of the 17 million vehicles sold in 2019.6
- Personal auto DWP should grow at a faster pace in 2021 without policyholder rebates as mileage and rush hour show relative rebounds. But the effects of supply-chain issues on new-car inventory will likely limit overall premium growth potential.
Claims frequency and severity: Both rising for insurers?
Next to unpack: Claims trends from last year and the potential outlook for 2021.
2020 claims patterns followed mileage (sort of)
Personal auto mileage patterns have exhibited distinct phases as drivers adapted to the pandemic. Less congestion led to fewer but more severe accidents in 2020, and frequency and severity largely followed mileage patterns, which dropped by more than 40 percent in March and April last year. Mileage remained about 10-15 percent below pre-pandemic levels over most of the second half of 2020. (We’ll go deeper into 2021 trends shortly, but minus the mileage downturn between Thanksgiving 2020 and early 2021, first-quarter 2021 trends largely mirrored those from the last two quarters of 2020,7 while Q2 2021 saw mileage recover to single-digit-down percentages relative to 2019 levels.)
If rush hour ceased to exist, would “fender benders” still be as common—and would drivers still be in a hurry?
This philosophical conundrum has both “no” and “yes” answers depending on claim size in the unusual reality that was the last three quarters of 2020. And the impacts of the pandemic vary disproportionately across the claim severity spectrum.
While frequency dropped tremendously due to less driving and mileage exposure, severity increased. What was behind this increase?
- The frequency drop did not impact all types of claims equally. A lack of traffic congestion led to a dramatic decrease in low-speed accidents, which are typically low-cost claims.
- Despite the drastic drop in miles driven, high-cost, severe accidents decreased only moderately in number relative to the overall drop in mileage (and also relative to the associated drop in overall claims). Within these larger claims lies a more ominous trend exhibited by a small proportion of drivers that holds major implications for society.
Open roads, riskier driving behavior
Verisk analysis suggested an emerging pattern of riskier driving behavior on roads thrown wide open during lockdown last year. More severe accidents and severe violations didn’t decline as quickly as overall accidents and minor violations, and this pattern showed signs of carrying forward into 2021.15
Among the worst outcomes of these trends was a 13-year high in traffic deaths despite a substantial drop in mileage16: Data from the Federal Highway Administration (FHWA) showed that although overall vehicle miles traveled (VMT) in 2020 decreased by 13.2 percent, the fatality rate for 2020 was 1.37 fatalities per 100 million VMT, up from 1.11 fatalities per 100 million VMT in 2019.17 Research by the National Highway Traffic Safety Administration indicated potential changes in risk-taking behavior compared with before the pandemic.
Influences that drove up claim severity in 2020
The pandemic led to numerous market shifts that drove up claim severity in 2020.
2021 profitability: Rising frequency, severity, and premium leakage? A likely scenario
Personal auto loss costs in 2021’s new normal may be akin to what followed the Great Recession, but with greatly accelerated and more erratic trends.
As mileage and rush hour continue to rebound this year, we expect frequency to rise—at least relative to 2020 trends—and some insurers are seeking rate increases due to the impacts on profitability.45 Other influences on frequency are more commercial vehicles on the road46, potentially riskier driving47, and the potential for mechanical failures stemming from the dichotomy of an aging vehicle fleet that recently hit a record 12 years old on average despite rising new car sales.48
New and used vehicle prices have surged during the pandemic: Since vehicle prices directly affect claim severity for total losses, we can learn from how used vehicle values remained elevated once demand returned after the Great Recession. Before 2020, the last time used vehicle prices increased more than 10 percent year-on-year was between September 2009 and September 2010.49 As restrictions related to the pandemic ease and economic activity picks up, temporary increases in the Consumer Price Index (CPI) are expected. The largest monthly change in the April 2021 CPI, 21%, was for used cars and trucks,50 and this sector’s record-setting CPI increased for five straight months between March and July.51
With demand recovering, rental car companies are rebuilding their fleets and keeping older inventory, leaving fewer options for used vehicle buyers. And new vehicle inventory is lacking because of supply-chain issues. In the past, the used vehicle market would absorb a glut of new vehicles over time, with a steady supply of off-lease and trade-in vehicles keeping prices low. But in 2021, second-quarter new auto sales were up 50.2 percent over 2020 despite tight dealer inventories and record high prices, pushing the average sales price in June above $40,000 for the first time, according to J.D. Power.52
Increased claims costs could follow, especially if parts suppliers can’t keep up. Properly trained mechanics may also be scarce after COVID-related furloughs, driving potentially higher costs for rental reimbursement coverage if vehicles take longer to repair. A last impact on profitability to consider is premium leakage, which is rising as 2021 patterns for mileage, commuting, undisclosed drivers, and garaging have shifted relative to risk exposures during 2020’s lockdowns.53 At the same time, fraud is up and application integrity is down.54
The big question: Will riskier driving patterns continue in 2021?
“People learned how to drive differently during the pandemic,” said Robert Wunderlich, director of the Center for Transportation Safety at the Texas A&M Transportation Institute, according to the Washington Post.55 Speed is among the biggest factors in car crashes, and he theorized that in lighter pandemic traffic, drivers felt liberated to accelerate. He didn’t express confidence that behavior would shift post-pandemic, which means the roads could remain more dangerous than before, at least for the foreseeable future.
Will the return of low-speed accidents be more of a driver on the distribution of claim severity by size in 2021, or will the riskier driving behavior and fatality patterns that emerged last year continue? Or, perhaps more likely, will we see a mix of both trends?
- 2021 will likely look much different from 2020 for the personal auto market—we won’t have 2020’s contraction, but new challenges loom for insurers.
- Insurers will need to monitor trend and loss development to adapt rates over time for rising frequency and severity related to rebounds in mileage and rush-hour congestion patterns, potentially riskier driving behavior, and other shifts.
- Trends of new-car price increases and higher loss costs on total-loss claims for used cars should stabilize over time, but insurers will likely feel the squeeze in 2021.
- It’s a good time for many insurers to rectify pandemic-driven premium leakage at renewal and align price to risk on critical rating factors that may have changed dramatically since 2020’s lockdowns. These include mileage, commute usage, garaging discrepancies, and teens with new licenses that were delayed because of the pandemic—plus “boomerang” young adults who aren’t listed on parents’ policies. Verisk can help identify and recover missing premium at renewal to increase profitability in the near term while not having to rely solely on rate levels to achieve needed premium.
- With online quotes likely driving more new business, digital transformation plans will continue to accelerate, potentially helping to identify fraud and improve rate integrity at point of quote.
A return to the “new normal” of auto insurance?
The auto market is shifting faster and more broadly than perhaps ever in its history. The next few years should stabilize and “new normalize” in terms of claims frequency and severity. Verisk will continue to monitor how much these phenomena revert back to expectations from the past, as well as to help insurers innovate and adapt to what becomes our new reality.
Will advanced driver assistance systems (ADAS) safety features continue to drive a gradual decline in frequency? What will be the severity offset on repairing ADAS components? How long will supply chain forces be a drag on the market? There are also broader questions around insurers’ digital transformation and meeting customer expectations altered by the pandemic.
Check out Part 1 of this series: Unpacking 2021’s New Normal for Personal Auto Mileage.