Auto Insurers Battle Volatility and the Need for Smarter Strategies
The auto insurance industry has experienced a tumultuous few years. A period of plummeting collision rates and soaring profits was followed by unprecedented challenges. Supply chain disruptions, increased collision frequency and severity, and wild swings in used-vehicle prices have driven loss ratios into the red for many companies. While some of these trends are beginning to stabilize, the fundamental challenges remain.
One major issue is unprecedented used-vehicle pricing. Used car prices surged dramatically through early 2022, while contract pricing systems, based on historical data, remained in place. Depreciation curves predicted continued value decline. The disconnect between these predictions and the reality of the market has created significant financial strain for insurers.
The $13,000 difference between what insurers using historical pricing models had anticipated and the reality they encountered during the past few years—tells you everything you need to know about threats to P&C insurer profitability in today’s unpredictable economy.
Depreciation Curves Miss the Mark
Consider the example of a 2017 Toyota RAV4. In January 2017, its estimated cash value was around $30,000. Based on historical depreciation, the predicted retail price today would be about $10,000. However, market value for a used 2017 RAV4 is closer to $23,000. This gap significantly impacts insurer payouts.
Rising costs of parts and a greater number of total loss claims add to the financial burden. The gap illustrates the risks insurers face in an unpredictable economy, demonstrating losses that significantly exceed projections.
Rising Premiums and the Erosion of Customer Trust
Insurers have largely responded to these challenges by raising premiums. The average auto insurance premium rose 9% in 2022, and a further 8.4% increase is projected for this year. These increases, however, have come at a cost.
Studies show a decline in customer satisfaction, frustrations with the claims process, and a surge in consumers shopping around for better rates. These trends undermine the goal of building long-term customer value and maximizing profitability.
Building a Predictive Premium Strategy
The solution lies in more accurate pricing models. These models should incorporate historical data, individual vehicle attributes, and continuous monitoring of driver behavior, location, and mileage.
These tailored valuation methods can establish in-market vehicle values based on an individual Vehicle Identification Number (VIN), outperforming a common depreciation curve, especially as the curve has proven unreliable during this period. Data and analytics needed to crunch it are readily available.
For example, it’s now possible to develop a dynamic RAV4 pricing model. This model can incorporate individual features, driver behavior, and real-time replacement costs, and the model can be factored into a customized premium offer.
Insurance companies that lack sophisticated analytics struggle most when pricing risks because of lagging technologies.
Stronger insurers can offer personalized risk rating and better prices. To benefit from these technological advances, insurers must abandon the outdated practice of a one-size-fits-all model. They must transition to an actual cash value approach for today’s and tomorrow’s risk exposures.
With used-vehicle prices potentially peaking, insurers must assess whether they can afford conventional practices or if their costs of doing business require an adjustment to premiums.
Disclaimer: This article is based on information from J.D. Power and does not represent financial or insurance advice. Please consult with a professional for personalized recommendations.
Written By Marty Ellingsworth
Marty Ellingsworth is Executive Managing Director, P&C Insurance Intelligence Group at J.D. Power. He is an expert in applied advanced analytics, data, AI, and cloud technologies, with a strong background in the insurance, healthcare, and scientific analysis fields.
