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Co-authored by Radost Wenman and Michael Chen.
Recently emerging cost trends in the world of personal auto insurance have disrupted an environment previously known for its underwriting profitability and predictable claim severity patterns. During the past year, we have seen increasing pure premium trends across all major coverages. What is driving these trends? Will they continue into the future? And might current private passenger automobile rating plans account for variables affecting these pure premium increases?
The auto insurance pure premium price escalation experienced since 2015 has been unprecedented in the last decade and almost seems paradoxical when analyzed against the backdrop of the advances in auto safety features, collision avoidance technologies and legislation. Expectations were that the advent of safety technologies and graduated driving laws would dramatically reduce the incidence of accidents and overtake the historical and steady increases in severity.
The most noticeable trends are discernible increases in the number of new vehicles on the road and in the number of miles driven, both fueled by the improving economy. Kelley Blue Book reports that 2015 was highlighted by a record high in new car sales, and while Kelley predicts that 2016 will be another strong year, it believes this trend will slow due to potentially increasing interest rates and a greater supply of off-lease vehicles. An additional Kelley indicator of this slow-down is softening demand, possibly resulting from more manufacturers’ buying incentives. The improving economy has also put more people back to work, which, coupled with lower gas prices, has contributed to more miles on the road for both commuters and discretionary drivers. According to the Federal Highway Administration (FHA), from August 2014 to August 2015, total annual mileage increased by 2.3%, and by an additional 3.4% from August 2015 to August 2016.
Sadly, traffic fatalities and injuries have also been on the rise. Reports issued by the National Highway Traffic Safety Administration (NHTSA) and the National Safety Council (NSC) indicate that fatalities rose by more than 9% from 2014 to 2015 (comparing the first nine months of each year). This is the largest annual percentage increase in the last 50 years, potentially making 2015 the “deadliest driving year” on record since the start of the 2008 recession. In addition, according to reports published by CCC Information Services (CCC), most of the increase in miles driven has been experienced on interstate highways, where speeds are higher and accidents more severe.
To further complicate matters, with the advent of the smart phone and connected car technologies, human behavior behind the wheel is increasingly disrupting road safety. Despite the crackdown on cell phone use while driving, distracted driving due to talking, texting or emailing on a cell phone is still highly prevalent, according to the latest research by the AAA Foundation for Traffic Safety (AAA). The NSC also estimates that approximately 25% of all crashes involve cell phone use. AAA reports that during the first month of 2016, around 87% of drivers engaged in at least one dangerous activity while driving. In addition to distracted driving, the report draws attention to other unsafe practices including speeding, drowsy or impaired driving, running red lights or not wearing a seatbelt. In a recent Wall Street Journal interview, Warren Buffet was quoted as saying, “If cars are better – and they clearly are – drivers must be worse.”
Interactive applications for smart phones and other electronic devices have been gaining a larger share of drivers’ attention, thus taking distracted driving to an entirely new level. In addition to Twitter, Facebook, Instagram, Snapchat, YouTube, and Waze, augmented reality apps, like the hit Pokémon Go, pose the latest threats to driver safety. Although Pokémon Go was only recently released in July 2016, there have already been incidents involving pedestrians walking into traffic and drivers crashing into poles, careening into ditches, and even grazing a police car while playing the game.
The legalization of recreational marijuana use has also raised both policymaker and public concerns, according to another recent AAA study which showed an alarming increase in accident fatalities involving cannabis. For instance, the study noted that the number of fatal crashes involving drivers under the influence of cannabis doubled in Washington State after it legalized the use of recreational marijuana. According to research by the Property Casualty Insurance Association of America (PCIAA), of the eight states that have shown the largest increase in auto claim frequency, seven have passed various laws relaxing restrictions on marijuana use. Law enforcement faces its own challenges since there is not currently a reliable roadside test for marijuana use, rendering it nearly impossible for police to effectively reduce the number of marijuana-impaired drivers on our roadways.
Increased accident frequency has been somewhat offset by continued advances in auto crash prevention technologies -- front and back-up collision avoidance systems, blind spot detection, lane departure warning, park assist, adaptive cruise control and self-braking, among others. However, while these systems boost driver safety and minimize accident risk, the equipment and labor required to replace or repair them force insurers to dig deeper into their pockets. Auto parts are more costly due to modern materials and more complex technologies, and the larger number of parts per claim in turn require higher payouts per claim. Labor costs have also surged due to more advanced automobile technologies, since repairs often now require more time, more specialized knowledge and training, and more expensive equipment.
CCC experts posit that unless we experience another major economic downturn, the growing economy, combined with the increase in registered vehicles (especially those equipped with Wi-Fi and other connected features) and distracted driving, will continue to exert a moderate upward pressure on auto claim frequency over the next few years until collision avoidance systems fully saturate the market.
Radost Wenman, FCAS, MAAA, is a Consulting Actuary with
Pinnacle Actuarial Resources, Inc. in the San Francisco, California office. She
holds a Master of Science degree in Statistics and a Bachelor of Science degree
in Mathematics from Stanford University. Radost has over nine years of
experience in the capacity of a pricing actuary in the personal lines segment.
In this role, she has developed home and auto pricing solutions through the
design and implementation of advanced predictive models.
Michael Chen, FCAS, MAAA, is a Consulting Actuary with
Pinnacle Actuarial Resources, Inc. in Des Moines, Iowa. He has over 12 years of
actuarial experience in the property/casualty insurance industry. Mike has
extensive experience in assignments involving pricing and product management
and loss reserving, with considerable experience in loss cost projections,
development and monitoring of key metrics, management reporting, and trend
analysis. He currently serves as a member of the CAS Examination Committee and
the Committee on Professionalism Education.
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