AUTO INSURANCE RATES INCREASES TRENDING UP
You may have a spotless driving record with no accidents or speeding tickets and an unblemished credit history, yet you still continue to see your auto insurance premiums rise year after year. You are certainly not alone! We Houstonians contend with many unique hazards and challenges when it comes to auto insurance claims risks that can negatively affect our auto insurance rates. This would make it appear as though Houston, and Texas as a whole, pay a lot more for auto insurance than other regions of the country. However, this could not be further from the truth. Car insurance premiums are trending up in all states across a broad spectrum of drivers. In fact, premium hikes have hit high and low risk drivers alike and not by negligible amounts.
Since 2012, the consumer price index for auto insurance is up over 21% while the CPI for the entire economy is up only 4.5% over this same time period. This presents the largest five year growth in premiums since the early 1990’s when premiums rose a whopping 29% between 1989 and 1993. The insurance industry cannot collude with one another and increase premiums for the sake of charging you more as the state insurance commissioners impose strict rules on insurance carriers and their premium increases. The industry as a whole is finding it much more difficult in this environment to sustain healthy profit margins. The single largest auto insurer in the nation, State Farm, has seen its revenue from premiums rise by 26% only to experience a 35% increase in the cost of covering claims during this same time period.
To put this into some perspective is to look at loss ratios of the 10 major insurers who have the largest presence in the Houston area as well as other major metropolitan areas across the country. A loss ratio is simply a ratio that measures premiums collected versus claims paid plus other business expenses like administrative, sales, marketing, and the like. In 2010, among the 10 largest insurance companies in Houston, they had a combined direct loss ratio of: 99.7%. By 2016, this loss ratio had ballooned to 107.1%. So, most large insurers have gone from a very small profit margin to a loss of more than 7%.
So why are so many insurance companies losing so much money in the auto market?
There are four main reasons for these losses and increased premiums:
Replacement Parts are Becoming More Expensive as Technological Advancements Improve Before 2010, fewer automobiles had sensors, cameras, and automation technology. To the contrary, most modern cars are equipped with this new technology which can cost 200 to 300% more to replace than counterparts just 10 years ago. This enhanced technology, in many respects, makes for a more safe driving experience. However, when accidents do happen, the replacement of parts becomes astronomically more costly and inevitably increases the amount of money the insurance carrier must pay to restore the automobile to its original condition.
Accidents are Becoming More Costly
Unfortunately the severity of auto accidents has been trending upward since 2010. Contributing to this alarming trend is the increase in the number of driving related fatalities across the country. The National Safety Council has indicated that fatalities are up another 6% in 2016 which represents the largest total number of fatalities since 2006. Fatal accidents cost the insurance company far more than accidents which do not involve any bodily injury. To compound this problem, medical care in Houston and throughout our country has increased an average of 12% which directly relates to a rise in the cost to treat bodily injury related to an auto wreck.
Declines in Investment Revenue to the Insurance Carriers
Insurance companies are some of the largest financial intermediaries on the planet. They take in money in the form of premiums and invest those dollars in high grade corporate and government debt instruments known as bonds. State insurance commissioners will not allow insurers to invest in any risky instruments like equities or commodities, so insurers are limited to debt instruments.
In the aftermath of the financial crisis in 2008, Alan Greenspan, the former chairman of the federal Reserve, began an aggressive campaign to dramatically lower interest rates in the economy in order to lower borrowing costs for consumers and inject liquidity into the financial system. Although this lowering of interest rates ultimately stabilized the markets in the wake of the financial crisis, it dramatically lowered insurers’ rates of return on their interest bearing bonds. Consequently, the largest insurers’ profits have been curtailed dramatically in this ultra- low interest rate environment we have found ourselves in over the last decade.
Most people would associate bad weather or wind storm damage with homeowners insurance. But, over the last decade hail and flooding have taken its toll on the auto insurance industry in a major way. According to NOAA data, flooding, hail, and tornadoes accounted for over 9 billion dollars in damages to autos in the wake of Hurricanes Sandy and other major weather events across the country. Hurricane Harvey proved to be the costliest weather event in U.S. history, devastating the Houston area with flooding not seen in modern history. In fact, some areas of Houston, particularly on the east and south side, experienced over 50 inches of rain in a 48 hour period. Places like Kingwood, Tomball, Cypress, Magnolia, Conroe, Katy, Pearland, Sugar Land, and League City took heavy losses to automobiles, homes, and businesses alike. It is estimated nearly 1 million autos were damaged by rising flood waters during Harvey, making it the most destructive hurricane in history in terms of property damage. Estimates now breach the 100 billion mark in combined property damage as a result. Houston is the fourth largest city in the nation and extremely car dependent. According to Cox automotive, over 94% of households in Houston own an automobile.
This makes Houston and surrounding areas particularly susceptible to massive losses from Hail, flooding, and other severe weather events.
Only Time Will Tell
NHTSA has determined 93% of all accidents are due to human error. So, self-driver automobiles could possibly dramatically lower auto accidents and fatalities which would have a lowering effect on auto insurance rates. However, this technology is not projected to be fully implemented until about 2030. Only time will tell if this new technology has a large impact on the auto insurance industry. In the meantime, we would need to see a significant uptick in interest rates and a dramatic fall off in natural disasters in order for insurers to see profitability rise and rates to come down. It will be interesting to see where rates and coverage levels end up in the future as new technologies emerge and economic forces take shape across the country. For now, consumers will need to regularly shop auto and homeowners insurance plans on a fairly regular basis to ensure they are not paying more than necessary for this insurance coverage.