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Personal auto: The cars stay afloat, but will the carriers?

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When it rains, it pours – and not just figuratively.

Hurricane Ida dropped more rain on New York City in one night than the city got in the whole month of September last year.

As a result, even the elevated FDR Drive was underwater, with hundreds of cars left stranded and likely totaled. Viral pictures of floating or submerged cars came from every corner of the city – from Fresh Meadows to Staten Island. And this was only New York and surrounding areas. Beyond these it was much worse. It looked like Hurricane Sandy all over again out there.

However, unlike Sandy, nobody really had the time or forewarning to prepare. Cars were left where they were parked, regardless of elevation. Traffic continued at normal levels, and everybody went to work.

But, the combination of a more intense than anticipated flooding event and a lack of preparation by most car owners may mean that Ida will have a more profound impact on personal auto carriers than storms of the past.

For personal auto carriers, who were already battling heightened loss cost trends, Ida’s deluge will be like rubbing salt into the wound.

Q2 commentary, along with Progressive's monthly reportings, pointed to the pandemic frequency benefits expiring, and severity unexpectedly spiking.

Historically, personal auto losses make up a smaller portion of total losses for memorable storms such as Katrina (5.3%) and Sandy (15%), with homeowners' and commercial lines sharing the vast majority of the pain. However, this loss will be different and add to personal auto carriers' pain.

With the initial surprise surrounding the spike in loss-cost trends out of the way, carriers are adjusting to the new normal. August’s release of monthly auto accidents and used car prices doesn’t show any surprises.

Carriers continue to take rate action in response to the elevated loss-cost trends and set catastrophe loads on long-term expectations. Carriers set cat loads according to their historical losses, down to a zipcode-specific level, but state regulators can dictate how a storm is used in updating filings. For example, regulators can have a different view of whether an event is considered a 1-in-100-year or 1-in- 250-year storm, ultimately impacting its catastrophe modeling and subsequent approach on rates.

What this means is: Don’t expect personal auto writers to turn around and raise rates because of Ida. Below we delve deeper into how this plays out.

First, it is too early to tell for certain if Ida auto losses in New York and New Jersey will resemble past storms.

Looking at historical loss ratios, New York (5.6% of national personal auto premiums) and New Jersey (3.1%) only saw incrementally higher losses personal auto losses from Sandy than prior years. New York saw the majority of auto claims from Hurricane Sandy with $400mn, while New Jersey seeing another $250mn in claims.

While a higher percentage of the claims were auto from Hurricane Sandy, total losses were much higher for Hurricane Katrina. Hurricane Katrina auto claims totaled $2.2bn, with Louisiana covering more than half of claims. Below we see the loss ratio spikes in Louisiana, which represents less than 2% national personal auto premiums, in 2005 from Katrina and 2016 from flooding. Ida losses in the Northeast are not expected to cause the same loss ratio spikes Louisiana experienced.

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Below, we see Geico, Allstate, State Farm, and Progressive have the highest market shares in the region, at 22%, 13%, 12%, and 12%, respectively, giving them the largest gross potential exposure to personal auto damage from Ida.

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Second, loss-cost trends were normalizing, but it’s unclear the degree to which the Delta variant could disrupt this.

Frequency trends have long been expected to revert as drivers returned to the roads after the pandemic slowdown. So, no surprise that August’s accident data shows the number of accidents reverting to pre-pandemic levels.

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Note, we estimate the frequency of auto claims by looking at the number of car accidents from a sample of state DOT databases. We estimate August’s frequency is in line with 2019 levels, however the trends differed significantly across states, with Florida and Texas seeing more accidents last month than in August 2019 and NYC still maintaining much of the pandemic benefits.

Unlike frequency trends, carriers were not expecting the severity jump that occurred this year. A confluence of factors took carriers by surprise, pushing severity higher than expected.

Vehicle-related inflation has seen some of the largest growth over the past few months of any insurance-related industrial category. Auto parts are facing critical shortages, most notably the computer chips that run everything from car radios to cruise control mechanisms.

Chip shortages are expected to extend well into next year due to the inelasticity of the semiconductor market. This, combined with a slower-than-expected return to work for car manufacturers and mechanics and a higher-than-expected demand for cars and parts, has contributed to elevated prices for cars and car parts. This in turn has led to a major increase in used car prices.

The prices of used cars, although still elevated, are slowing. The Manheim index, which tracks the wholesale used car prices, was down 0.8% in the first half of August, after peaking in May.

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Third, although Ida is unlikely to prompt more rate-taking, companies were already starting to take rate.

Personal auto monthly rate changes continue to make a slow but steady progression. Industry-wide rates were up an average of 1.2% in August vs. 0.9% in July.

We did note carriers seeing some objections from regulators that may be slowing the process a bit, but anticipate seeing further increases this year.

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In summary, 2021 will be a tough year for personal auto carriers, which are facing worsening loss-cost trends from 2020. Now hit with an added catastrophe in Ida, carriers are taking rate but it could be a while before the industry fully recovers.

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