AM Best has revised its market segment outlook for the US personal auto insurance market from stable to negative. Best cited a significant deterioration in carrier results in the second quarter of 2022, driven by continued inflationary pressures and corresponding fare adequacy challenges, as the reason for the downgrade.
In his last Best Market Segment Report, “Market Segment Outlook: US Personal Auto”, AM Best estimated a deterioration in the private passenger auto liability claims ratio in the first half of 2022 of more than 11 percentage points to 71.5 from 60.1 at the same period last year. The auto physical damage loss ratio increased by about 16 percentage points.
“Many carriers continue to seek fare adequacy in response to the frequency and severity levels of post-pandemic lockdown, but their ability to stay ahead of current trends has been a challenge,” said Richard Attanasio, senior manager at AM Best. “The speed and effectiveness of the rate increases sought varied across regulatory jurisdictions.”
Previously, the regulatory response to rate adequacy needs has not been a significant impediment to generating adequate operating results, AM Best said. However, the report found that the scale of fare needs has increased, testing the ability of carriers to maintain adequate operating results. While inflationary trends will eventually stabilize as supply chain and labor challenges abate, there is still significant uncertainty as to how long this rate challenge environment will last.
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The increasing use of telematics and usage-based insurance can help mitigate the frequency of losses, AM Best said. However, it is unlikely to have a significant impact in the short term.
“Given the persistence of escalating claims costs, the segment’s ability to return to underwriting profitability in 2022 appears highly unlikely,” Attanasio said.
The report also noted that volatility in the investment market put pressure on results, although many auto insurers tend to hold high-quality investments with a long-term investment horizon, and are therefore unlikely to realize these losses.