October CPI: No signs of easing, auto carriers adjust to new normal
Yesterday, the BLS released October CPI data which included 6.3% personal auto premium inflation. The figure is up from 4.8% in September and -0.8% in August.
While September’s figure may seem high, 2020 served as an exception as frequency trends diminished materially and insurance costs plummeted. Compared to 2019, insurance costs appear to be slightly lower now, although costs are catching up. This compares to annual increases of ~4% over the past decade.
The CPI release follows worsening loss cost trends and delayed rate action. In response, third-quarter earnings releases from carriers with large personal auto books such as such as Progressive and Travelers indicated that firms are adapting to the reality of inflation-fueled higher loss-cost trends.
Vehicle severity continues to outpace medical severity
Auto severity, estimated using CPI trends for medical and vehicle costs, was 5.1% for October, higher than trends over the past two decades.
As the economy emerged from the pandemic, worsening severity in medical- and vehicle-related inflationary measures surprised some personal auto carriers. Drivers returning to roads have not adjusted their pandemic-era unsafe driving habits. Traffic deaths in the first half of 2021 rose faster than any other six-month period since the Federal Transportation Department began publishing crash death statistics in 1975.
Vehicle CPI figures rose to 7% in October, from 5.6% from last month. The result was led by parts & equipment and bodywork, which have been stressed due to supply chain issues, at 8.8% and 6.8%, respectively. Parts & equipment inflation is now higher than at any point since the year 2000.
Maintenance & repair inflation was reported as 5.4%, a 1.4pt jump from last month and the highest reported number since the 2008 financial crisis. This increase reflects the worsening of ongoing hiring issues that the auto industry is facing.
The same inflationary pressures pushing parts & equipment prices higher are also adversely affecting other segments of the auto industry. For example, supply chain issues such as the still-worsening shortage of semiconductors reduce the supply of available new vehicles, which pushes consumers towards purchasing used cars or repairing the ones they already have.
As more drivers hold onto their old cars for longer, the supply of used vehicles available to buy is also reduced. As a result, used car prices have been pushing up aggressively since mid-2020 as drivers searched for alternatives to unavailable new cars. The chart below shows the rise in wholesale used car prices.
October saw used car prices rise by 38.1% YoY to their highest average price level since Manheim, an automobile auctioneer, began measuring prices in 1997. Van prices rose higher than any other type of vehicle, with prices up 49.5% YoY.
According to the National Automobile Dealers Association, nationwide new car inventory is down to under a million available units, which is a 65% decrease from the beginning of 2021. New car availability is down 71.1% YoY, according to Cargurus, although new vehicle inventory did increase 1.1% in October compared to the previous month. Used car inventory was essentially flat at -0.02% in October.
Medical CPI figures continue to trail vehicle CPI at 3.2% (up from 2.6% in September). Average medical inflation has fallen behind vehicle-related inflation since May, a reversal of the year and a half since January 2020 that medical-related inflation had outpaced vehicle inflation due to the pandemic. Hospital services and physician services led the medical CPI result at 4% and 3.9%, respectively.
Frequency trends have fully returned to pre-pandemic levels
We estimate October’s frequency is in line with or slightly exceeding pre-pandemic levels. However, frequency trends differed significantly across states. Florida and Texas saw more accidents last month than in October 2019, while Ohio and NYC still maintained much of the pandemic benefits and reported lower accident frequency levels.
Industry rate action lags behind loss cost trends
Personal auto rate filings continued to show increased rates but likely still not enough to offset loss cost trends. Industry rates are up 2.5% thus far in November compared to 2.1% for October and September.
In its quarterly earnings report, Travelers noted that state regulators are working with carriers to increase rates at a reasonable pace, given that 2020 was an abnormal year and rate approvals are usually judged based on prior-year performance.
As supply chain issues continue to worsen, it is increasingly unlikely that inflation will remain transitory. The subsequent severity spike is leading to a gap between rate and loss cost trends that carriers have been slow to correct. Therefore, looking forward, we are likely to see continued rate action while carriers balance their competitive position and a possible downturn in growth.