Auto Insurance Landscape Under Pressure
Auto insurers in the U.S. are navigating a complex and challenging market environment, facing significant hurdles that will likely persist through the end of the year and beyond, according to the 2024 U.S. Auto Insurance Trends Report from LexisNexis Risk Solutions. The report highlights how factors like risky driving behavior, the increasing prevalence of electric vehicles (EVs), and consumers’ tendency to shop around for better rates are impacting the industry.
“Auto insurers are navigating a dynamic and challenging market environment in 2024. For their part, consumers are displaying more unpredictable driving and policy shopping behavior and increasingly switching carriers to find better rates,” said Adam Pichon, senior vice president of global analytics, insurance, LexisNexis Risk Solutions.
Pressures on Profitability
The auto insurance industry faced a combined ratio of 105 in 2023, a slight improvement from 112 in 2022. However, persistent inflation, elevated claims costs, and concerning levels of risky driving continue to pressure profitability. Insurers have responded with double-digit rate increases.
LexisNexis emphasizes the importance of balancing market acquisition and retention with rate adequacy. “It is crucial for insurers to balance market acquisition and retention with rate adequacy and utilize data-driven insights to help manage risk and maintain profitability to be set up for continued success as the market begins to soften.”
Shopping and Swapping Rises
Consumer behavior significantly impacts the market. Rate shopping and policy switching surged in 2023, with rates rising an unprecedented 14% over the previous year. This triggered consumers to seek more favorable terms elsewhere. New policies rose 6.2% in 2023 and retention rates fell from 83% to 80%.
The report underscores the importance of maintaining consumer loyalty. Approximately 41% of consumers with auto insurance at the end of 2023 shopped for a new policy at least once. Overall shopping increased 4.7% in 2023. A lack of a consistent renewal strategy may threaten an insurer’s ability to compete on new business pricing.
Risky Driving Behaviors on the Rise
Another significant challenge is the increase in risky driving, including both moving and non-moving violations. Overall driving violations spiked 4% in 2023 compared to the previous year. Distracted driving, particularly among younger drivers, continues to climb. Gen-Z drivers saw a jump of 24% in violations from 2022 and a significant 66% increase since 2019.
The data reveals concerning trends across the board: From 2022 to 2023, distracted driving rose 10% across all age groups. DUI violations increased by 8% in the first six months of 2023 compared to the same period in 2022. Furthermore, both major speeding and minor speeding violations experienced continued upward trends, highlighting a widespread pattern of risky behavior on the roads.
Despite these challenges, U.S. Department of Transportation estimates show that total miles driven rose 2.2% in 2023, returning to pre-pandemic 2019 levels.
Claim Severity and Complexity
Claim severity has escalated since the pandemic, posing substantial challenges to the industry. Bodily injury claims are up 20% compared to 2020, and material damage has increased by 47%. In 2023, over a quarter (27%) of collision claims resulted in total losses, requiring vehicle replacement or alternative transportation.
The rising costs associated with bodily injury are made worse by the fact that costs may exceed minimum coverage limits for many drivers, which further complicated the insurance claims landscape.
The High Cost of Legal Counsel
Attorney involvement significantly drives up claims costs. Over half (51%) of claimants using legal representation received a higher settlement. The data clearly reflects this trend: 93% of claimants who acquired legal counsel intend to retain similar services in the future.
According to LexisNexis, auto accident victims frequently encounter legal representation. Following an accident, 85% of claimants are approached by one attorney, and 60% are contacted by more than one. The increased need for legal services has contributed largely to the rise in costs.
The Electric Vehicle Influence
Electric vehicles are gaining market share. EV sales grew by 54% in 2023, compared to a 13% increase in light-duty vehicle sales. The total number of insured EVs grew by 40% to 3.9 million. In contrast, the number of privately insured passenger vehicles grew by only 1.2%, to 265 million.
EVs pose unique challenges, with driving experiences contributing to higher and more severe claims than those involving internal combustion engine (ICE) vehicles. In 2023, EV claims frequency increased by 17% and severity went up by 34% compared to ICE vehicles. The steady rise in insurance rates had an even more significant effect on EV insurance shopping in 2023, with 24% of new EV buyers shopping for lower rates compared to 19% of new PPA buyers who shopped for coverage last year.
LexisNexis anticipates continued growth in the EV segment. “Although sales began to slow in the fourth quarter of 2023, the EV segment of auto insurance is expected to thrive in the next few years,” says the report. They urge auto insurers to better understand the distinct risk profiles of EVs and create targeted rating and underwriting strategies to capitalize on this growth opportunity profitably.
