This is the first in a series of articles that consider trends, predictions, and strategies for personal auto insurance leaders to compete in the “new normal”. To get the latest insights, be sure to sign up for our new normal webinar.
Philosopher George Santayana penned the famous maxim, “Those who cannot remember the past are condemned to repeat it.” Comparing the current economic downturn stemming from the COVID-19 pandemic to the Great Recession, which lasted from December 2007 through June 2009, raises several questions:
- Is history about to repeat itself for personal auto insurers?
- Can industry leaders learn from the past?
- Or are the two time periods more akin to alternate universes?
The answer to all of these questions might be a confusing “yes.”
In 2016, Verisk published Auto Claims Frequency, Severity: What’s Behind the Rise?, an analysis of key trends that challenged industry competitiveness and profitability as the economy emerged from the Great Recession. Let’s start by seeing what we can learn from the past…
Parallel vs. alternate universes
It’s hard to gain wisdom from an experience that has no previous basis of comparison.
- Parallel universe trends: In viewing the current moment, many initial "new normal" trends mirror those from the Great Recession. Today’s trends in initial industry performance, unemployment, vehicle sales, miles driven, claims frequency, and premiums all appear directionally similar to those shown above.1
- Alternate universe trends: Here’s where the two economic cycles diverge: the new normal trends are vastly greater in speed and magnitude2, defying comparison with almost any economic cycle in recent history. In addition, the catalysts for each economic downturn were different. With the Great Recession, the subprime mortgage crisis and subsequent burst of the U.S. housing bubble led to a cycle of economic downturn and recovery that took years. The current crisis was caused by a worldwide pandemic that virtually shut-down an otherwise strong economy. Only time will tell whether the economic recovery is faster this time.
Heading into both economic downturns, the industry recorded relatively strong financial performance. Perhaps the biggest upcoming unknown is the duration of the new-normal trends before they reverse course or go in a completely new direction.
Will the COVID-19 pandemic leave a lasting mark on society and business that rewrites previous assumptions and disrupts the industry? Comparing facets of the personal auto market over the two time periods may be instructive.
- Parallel universe trends: Both the new-normal and Great Recession economic cycles brought rising unemployment. (At the time of this publication, the latest downturn hasn’t been declared an official recession yet, but an increase in unemployment is a defining characteristic of a recession, where there is a significant decline in economic activity lasting more than a few months spread across the economy.)
- Alternate universe trends: The new-normal downturn is different from the Great Recession in its pandemic trigger. Campbell Harvey, a professor of finance at Duke University, predicted a recession for 2020 or early 2021. But his comments highlight the divergence between the two events: “In the global financial crisis [in 2008-09], we never could tell when it was going to end. This time the cause is clear—it's a biological event, and the solution is also clear: another biological event.” Harvey is betting on a vaccine and a “skinny U” shaped recovery.3
The trajectory and magnitude of the increase in unemployment this time is starkly different from the past. The infographic shows it took 22 months from the beginning of the Great Recession for unemployment to increase 5 percentage points. In two months—March and April of 2020—the unemployment rate has spiked by more than 11 points, and this probably doesn’t capture all of the new job seekers as overburdened state agencies struggle with application and reporting challenges stemming from COVID-19. In terms of percentage-point climb per month, the new-normal unemployment trajectory is 24 times “steeper” than that for the Great Recession—the most rapid increase in the history of monthly tracking of unemployment, which dates back to the 1940s.4
- Parallel universe trends: The infographic highlights the “Carpocalypse,” a seven-year slump between 2007 and 2014 when new car sales stagnated and the average age of vehicles on the road continued to increase. This trend held down claims severity during the Great Recession and for a few years after. At least initially, new car sales are following a parallel path in the new normal: J.D. Power and Associates reports new car sales were down 50 percent in April 2020 compared with April 2019.5
- Alternate universe trends: Shelter-at-home orders could be one driver of the magnitude of decline in new car sales. J.D. Power said its analysis revealed some recovery after sales hit rock bottom in March with a 59 percent drop from a year earlier. In April, the company reports new auto sales rebounded four consecutive weeks in a row, averaging five percentage points per week, to end the month 20 percent above the trough.6 We’ll watch these trends as more of the economy reopens.
- Parallel universe trends: The infographic shows Americans drove less during the Great Recession as struggling consumers lost jobs and cut expenses. Total miles driven declined by 2.5 percent over the first 18 months of the 2008-09 downturn. This trend persisted another 30 months after the official end of the Great Recession in June 2009, with mileage ultimately declining by nearly 3 percent over four years from the former records set in late 2007. Then, in 2012—with the economy improving, new car sales rebounding, and the price of gas coming down—an upsurge began. Aggregate annual miles once again exceeded 3 trillion in 2014 and, over the next six years, eventually climbed 9 percent from the trough.7
- Alternate universe trends: Miles have also declined in the new-normal cycle, but precipitously, plunging more than 40 percent in March and April 2020 based on data from J.D. Power.8 But is this number so low because of shelter-at-home orders and more employees working remotely? And will it take years for miles driven to rebound in the new normal? The answer to the first question is almost certainly “yes.” One glimpse into how quickly mileage might rebound comes from a study conducted by the University of Maryland’s Center for Advanced Transportation Technology using data from mobile devices. After Georgia’s economy partially reopened on April 24, out-of-state trips to the state increased 13 percent to 62,441 trips a day. "Our data suggests that the partial reopening orders in some states have prompted a sharp increase in mobility behavior," said Lei Zhang, the institute's director and the lead researcher.9
What’s not yet clear is whether businesses will allow a high percentage of their employees to continue work from home, thus setting a new normal for commutes and miles driven. And when people do travel, auto trends may be shaped by how attitudes evolve, for better or worse, toward ride sharing, suburbanization, mass transportation, car-based leisure trips, and autonomous-vehicle innovations. Some commuters may choose their own cars over crowded trains or buses, and vacationers this summer may choose a drivable destination over a plane trip to escape their months in lockdown.
Claim frequency and severity
- Parallel universe trends: Both the frequency and severity of claims trended downward during the Great Recession and for a number of years beyond, paralleling mileage trends and the increasing average age of vehicles on the road. Likewise, initial new-normal accident frequency figures reflect cars being driven much less in March and April of 2020.
- Alternate universe trends: Assuming that claims frequency will be down, auto insurers are expected to pay $13 billion in rebates and credits to consumers.10 But what will happen to new-normal claims severity? One major difference from the Great Recession is challenges with supply chains, a factor that could drive up the cost of parts and repairs significantly.11 There is even a question of where claims frequency is headed coming out of March and April. USAA’s chief executive officer, Wayne Peacock, reported recent increases in car crashes even with coronavirus-related restrictions on businesses in place, which he attributed to “cabin fever.”12 Early data suggests higher severity may result from increased speeding on less-congested roadways during pandemic-related lockdowns.
In some states, driver testing requirements may even come into play. Already, Georgia temporarily waived road test requirements for new drivers, and Wisconsin is piloting an optional waiver. Georgia later reversed course and will require newly licensed drivers who skipped the test to take it after all,13 but Wisconsin’s waiver for 16- and 17-year-olds remains, subject to parental approval.14
Once recovery begins in earnest, a number of factors point to potentially different outcomes. For example, if new car sales surge again as they did after the Great Recession, the prevalence of advanced driver-assistance systems (ADAS) will likely reach unprecedented levels, creating a fleet that’s safer than ever.
- Parallel universe trends: During the two years after the Great Recession, direct written premiums contracted slightly, on average 0.2 percent as shown in our infographic, and a similar trend appears likely in 2020 given already announced premium rebates and credits.
- Alternate universe trends: We expect the new-normal U.S. personal auto market to contract significantly. Numerous insurers are currently offering premium refunds of 10-30 percent for durations ranging from 1-6 months (which alone represents about 5 percent of annual premium).15 Some insurers are issuing a second round of rebates, while some are offering to switch policyholders to usage-based insurance programs, driving premiums even lower for price-conscious consumers.16 Additionally, taking into account that insureds during the recession may shop for cheaper premiums and reduce coverage or limits, premiums may see a historical decrease.
The infographic points out that it took five years after the Great Recession for claims frequency and severity trends to spike, eventually leading to a hard market in which insurance leaders were focused on profitability, rates, underwriting, and confronting expenses and premium leakage. Will the new normal be déjà vu for the industry?
The accordion, assumptions, and adaptation
In time, the new-normal downturn may resemble a greatly compressed version of our Great Recession infographic—pushed together like an accordion: New-normal trends are on vastly accelerated timelines and of unprecedented magnitude. And depending on the course of events, the cycle could be faster on the back end, or it could lead to a grim outcome with combined ratios reaching 120, according to a possible scenario presented in a report by McKinsey.17
Questions abound. Is the industry making correct initial assumptions based on strong data? Do they enable industry leaders to make strong decisions that will increase competitive advantages? How will the industry adapt to the new normal? Will there be relative winners and losers, or simply survivors that were able to change and adjust?
Recent shopping data from Jornaya indicates that consumers want to save on auto policies, and the company speculates, “In the not too distant future, we’ll likely look back at our present state of affairs and recognize it as one of the biggest land grabs, in terms of market share, in the history of personal lines insurance.”18
Verisk is offering an opportunity to explore many of the questions surrounding the current moment with a panel of experts.
- Verisk research
- Verisk research (see infographic)
- Howard Gold, “Opinion: Economic expert with perfect record calling recessions is betting this one will be over by the end of 2020”, MarketWatch, May 16, 2020. < https://www.marketwatch.com/story/economic-expert-with-perfect-record-calling-recessions-is-betting-this-one-will-be-over-by-the-end-of-2020-2020-05-06 >, accessed on June 2, 2020.
- Verisk research (see infographic)
- Michael Wayland, “US Auto Sales Recovering During Coronavirus Pandemic But Still Significantly Down, J.D. Power Says”, CNBC, April 22, 2020. < https://www.cnbc.com/2020/05/28/us-auto-sales-recovering-but-still-devastated-from-coronavirus.html >, accessed on June 2, 2020.
- Ed Garsten, “Positives Among Dreadful April Auto Sales”, Forbes, May 1, 2020. < https://www.forbes.com/sites/edgarsten/2020/05/01/positives-among-dreadful-april-auto-sales/#511326cf1ff1 >, accessed on June 2, 2020.
- Verisk research (see infographic)
- “Auto Insurance During COVID-19: Premium Relief: Consumer Impact and Outlook”, J.D. Power, published on Hubspot, May 14, 2020. < https://cdn2.hubspot.net/hubfs/4239280/Files/COVID-19/20200416_PULSE%20Insurance%20During%20COVID19_Distribution.pdf >, accessed on June 2, 2020.
- Mallika Kallingal, “Visitors Rushed to Georgia as Businesses Reopened, Says University of Maryland Study”, CNN, May 6, 2020. < https://www.cnn.com/2020/05/08/us/visitors-rush-to-georgia-after-reopening-trnd/index.html >, accessed on June 2, 2020.
- Verisk estimate, based on Lyle Adriano, “Insurers offering $10.5 billion in rebates – but who is offering what?”, Insurance Information Institute, April 13, 2020. < https://www.insurancebusinessmag.com/us/news/breaking-news/insurers-offering-10-5-billion-in-rebates--but-who-is-offering-what-219397.aspx >, accessed on June 2, 2020; and Faris Khan, “State Farm More Than Doubles Its Auto Premium Relief Effort,” P&C Specialist, May 18, 2020. < https://www.pandcspecialist.com/c/2755513/338383/state_farm_more_than_doubles_auto_premium_relief_effort >, accessed on June 2, 2020.
- Jared Smollik, Jim Davidson, “Will Fewer Drivers on the Road Mean Lower Auto Losses? It Depends”, Visualize, April 13, 2020. < https://www.verisk.com/insurance/visualize/will-fewer-drivers-on-the-road-mean-lower-auto-losses-it-depends/ >, accessed on June 2, 2020.
- Kevin Stankiewicz, “USAA chief: Coronavirus ‘Cabin Fever’ May Be Behind Car Crash Uptick After Initial Steep Decline”, CNBC, May 4, 2020. < https://www.cnbc.com/2020/05/04/coronavirus-ceo-says-usaa-sees-uptick-in-car-crashes-after-steep-decline.html >, accessed on June 2, 2020.
- Brian Kemp, “Regarding the Department of Driver Services and On-the-Road Driving Exams”, State of Georgia Executive Order, May 12, 2020 < https://gov.georgia.gov/executive-action/executive-orders/2020-executive-orders >, accessed on June 2, 2020.
- “FAQs: Road Test Waiver Pilot Program”, Wisconsin Department of Transportation, May 5, 2020.
< https://wisconsindot.gov/Documents/dmv/shared/FAQ-RdTest.pdf >, accessed on June 2, 2020.
- Verisk research (see footnote 10); Aggregates and Averages, AM Best, 2020.
- Varada Bhat, “Demand Swelling for Telematics-Based Auto Insurance Amid Pandemic, Top Carriers Say”, P&C Specialist, May 8, 2020.,
< https://www.pandcspecialist.com/c/2745053/336603 >, accessed on June 2, 2020.
- By Faris Khan, “Auto Insurers Can See Combined Ratio Spike to 120 if Pandemic Causes Prolonged Recession, McKinsey Warns”, P&C Specialist, April 27, 2020. < https://www.pandcspecialist.com/c/2731033/334443 >, accessed on June 2, 2020.
- Jornaya, “The Pulse of Insurance Consumer Shopping: Rapid Heartbeat Detected,” Jornaya, April 28, 2020 < https://www.jornaya.com/the-pulse-of-insurance-consumer-shopping-rapid-heartbeat-detected/ >, accessed on June 2, 2020.