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CPI: Highest rate in 40 years keeps pressure on auto carriers

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The BLS released December CPI data on Wednesday, including 4.1% year-over-year personal auto premium inflation.

The figure is down from 5.7% in November and 6.3% in October. While October’s figure may seem high, 2020 served as an exception as frequency trends diminished materially and insurance costs plummeted. General inflation rose 7% in December, the fastest rate in 40 years.

The CPI release follows a long trend of worsening loss-cost trends and catch-up rate action.

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Vehicle severity is at the highest level in more than 30 years.

Auto severity, estimated using CPI trends for medical and vehicle costs, was 6.1% for December, a 0.6pt increase from the previous month and higher than trends over the past three decades.

Yesterday, we published an analysis of mobility trends which showed that six of the top ten states had showed declines in miles driven, while four showed increases during the earlier stages of the Omicron wave.

It will be interesting to see if Q4 reporting trends for personal auto players show similar/dissimilar trends. Q4 results should also give us an insight into how companies are faring given the tick-up in loss-cost trends.

As the economic recovery continues, worsening severity in medical- and vehicle-related inflationary measures has become the norm. 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 first published crash death statistics in 1975.

Vehicle CPI figures rose to 8.9% in December, up from 7.7% last month and the highest in 40 years. The result was led by parts & equipment and bodywork, which have been stressed due to supply chain issues, at 11.3% and 10.6%, respectively. Parts & equipment inflation rose from 10.2% in November and remains higher than at any point since before the year 1980.

Maintenance & repair inflation was reported as 4.8%, holding steady with the 4.9% figure from last month, and remains higher than any point since the 2008 financial crisis. The sustained high level of inflation reflects the worsening of ongoing hiring issues that the auto industry is facing.

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Elevated inflation is also impacting other segments of the auto industry. For example, supply chain issues, including the shortage of semiconductors, reduce the supply of new vehicles for sale and push drivers towards buying used cars or repairing the ones they already have.

As market dynamics force more people to drive their older cars for longer, the availability of used vehicles for sale is reduced. As a result, used car prices have been pushing up aggressively as drivers search for alternatives to unavailable new cars. The chart below shows the rise in wholesale used car prices.

December saw used car prices rise by 47% YoY, to their highest average price level since Manheim, an automobile auctioneer, began measuring prices in 1997.

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Compared with still-rising vehicle CPI, medical inflation figures remain at more normal levels. Medical CPI continues to trail vehicle CPI at 3.4%, in line with November’s figure of 3.3%. Average medical inflation has fallen behind vehicle-related inflation since May, a reversal of the year and a half since January 2020 in that medical-related inflation had outpaced vehicle inflation due to the pandemic. Physician services and hospital services led the medical CPI result at 4.3% and 3.3%, respectively. Medical care CPI rose to a comparatively low 2.5%, up from 2.1% in November.

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Frequency trends are in line with pre-pandemic levels.

We estimate December’s accident frequency is roughly in line with pre-pandemic levels, having recovered from 2020 lows. However, frequency trends recovered unevenly across states. Florida and Texas saw more accidents last month than in November 2019, while NYC still maintained much of the pandemic benefits and reported lower accident frequency levels.

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Industry rate action is still catching up with developing loss-cost trends.

Personal auto rate filings continued to increase. The one benefit this industry has is the short-tail nature of the product allows it to respond sooner than other segments. Industry rates are up 4.09% thus far in January compared to 3.07% for December and 3.18% for November.

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In summary, elevated loss-cost trends are continuing and even intensifying, and carriers are ramping up rate action to compensate. If inflationary pressures do not ease over the coming months, we can expect continued rating action as carriers look to balance their competitive position and protect themselves against loss-cost trends.

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