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Progressive call takeaways: How is remote work changing loss-cost trends?

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Yesterday, Progressive held its second-quarter conference call, which serves as a recap of pricing, loss-cost and growth trends.

Despite management's best efforts to direct the attention of the conference call’s participants towards their successful strategy in the commercial auto space, questions instead focused on personal auto and what the company is seeing in terms of loss cost trends.

Last month’s results hinted that Progressive may have been caught a bit off guard by the pace and extent of the loss-cost reversion.

Prior to the pandemic, personal auto carriers saw improving trends, as rate actions were outpacing steady frequency and severity trends.

By late 2019, severity trends began slowly rising. CPI data points to an estimated severity inflation increasing from 1.7% in January 2018 to 3.2% in January 2020. However, these trends were quickly overshadowed by the material frequency benefits that personal auto carriers saw in the prime of the pandemic as drivers stayed off the roads.

Personal auto carriers were expecting a reversion in claims activity as Covid restrictions were lifted. However, the reversion of frequency trends has been accompanied by a more complicated severity story.

The combination of rising used car prices, changing driving habits and somewhat unanticipated social inflation have led to higher claim costs than Progressive, or the industry, had anticipated.

Below, we see Progressive’s June results point to a continued reversal of frequency trends, as well as significantly higher severity. The company estimates severity increased 6% for the first half of 2021.

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The company faced questions on its trend outlook going forward, as well as rate responsiveness.

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It appears the pandemic may lead to an increase in severity trends that were overshadowed by the frequency benefits as drivers stayed home. And while some aspects of the escalating severity trends are likely to diminish, attorney involvement will continue and may have more significant impacts based on its book of business.

Remote work paints a complicated picture for personal auto carriers.

With remote work proving to be a successful option and the Delta variant resurfacing raising fears of closed spaces, employees are not rushing back to the office.

While this sounds like a positive as it would translate to fewer drivers on the road and fewer accidents during commuter hours, Progressive noted attorney representation has increased, perhaps as people are more exposed to TV advertising.

Attorney involvement has grown materially over the years. The percentage of personal injury protection claimants that hired an attorney rose from ~17% in 1977 to nearly 40% in 2017, gradually increasing nearly a point a year from 2012 (according to the Insurance Research Council).

While easy to blame insurers’ claims processing on the increase in attorney involvement, the decision to hire an attorney is heavily influenced by the perceived ability to get a fair settlement without it, regardless of the insurer's process or offer amount.

Contrary to other lines of business, the rise in attorney involvement doesn’t translate into more court cases. Instead, the attorney’s preference is to settle outside of court, and this has been particularly true during the pandemic when courts were closed.

In addition, while leading to higher total settlement amounts, attorney involvement has not been found to benefit the claimants. Claimants end up waiting twice as long for payment when an attorney is involved and on receiving less after paying for the expenses/legal fees.

In other words, this is a lose-lose scenario for the claimants and the insurance companies.

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Book of business may dictate personal auto loss-cost trends as attorneys seek higher payouts.

While these severity trends will be impacting carriers across the board, our analysis suggests that Progressive’s targeted driver may also be contributing to the unexpected shift in loss-cost trends.

Progressive has historically targeted customers looking for full coverage beyond the minimum state-required coverage limits. They have referred to the Robinsons and Dianes as the majority of their customer basis. The Robinsons refer to those that would typically purchase bundled home and auto coverage through an agent and Dianes refer to drivers who are consistently insured, likely to be renters (as opposed to homeowners), and may purchase direct-to-consumer.

A much smaller part of their book is for Sams, the “inconsistently insured". Other carriers may refer to this as the non-standard book.

Progressive's book seems likely to be more heavily weighted towards remote workers, with higher earning white-collar positions more easily converted to remote work.

Higher coverage limits also enhance the possibility of attorney involvement. This suggests that the standard/preferred auto carriers might see a heavier increase in severity trends.

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The hybrid-work driving model and attorney involvement is likely establishing a new normal in loss-cost trends.

Severity trends will likely see some improvement next year as used car prices return to historical ranges, once the chip shortage that has been depressing vehicle supply is addressed. However, the impacts of attorney involvement are unlikely to subside.

In addition, the emptier roads have permitted accidents at higher speeds, differing from the more common commuter-hour fender benders, and have led to more severe accidents.

This, coupled with the reverted frequency trends seen in the chart below, could end up leaving severity trends rising faster than pre-pandemic levels.

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How quickly and significantly personal auto carriers choose to respond to the new level of loss-cost trends remains a question. Progressive hinted that growth may need to slow in order to meet the company’s 96% targeted combined ratio: “If we have to make a choice, profit trumps growth as profit is one of our five core values.”

Looking forward, these trends could present a significant hurdle to the personal auto industry, waiting for a mean reversion in loss-cost trends and growing at the same time. That means that results could worsen from here if the industry is only now contemplating the impact of attorney involvement and the rate adequacy of the book.

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