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Personal auto: Revisiting the divergent claim counts trend as we head to quarter-end

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Claims: In 2020, Covid caused a large drop in personal auto claims followed by an equally large rebound in 2021. The Inside P&C Research team looked at Schedule P claims data and found that during this time there has been a divergence in carrier performance trends with respect to claims count and severity, as well as the narrative surrounding lost costs.

Carriers who are ahead in responding will also be able to return to profitable growth earlier when the cycle turns vs competitors who are playing perpetual catch-up.

Last week Progressive reported its usual monthly numbers, and since it was the third Thursday, Allstate also gave its monthly rate action update. For Progressive, its monthly results continued to show the usual interplay of earned rate and loss cost trends. For Allstate, the latest rate action brought the year-to-date change to double digits.

This year has had a bit of back and forth for the personal auto lines, where companies who were ahead on the rate curve seemed to be doing a better job in addressing the shift in loss cost trends.

For companies who were playing catch-up on rate, loss cost trends have continued to rear their heads as supply chain issues, driving behavior, used car pricing, and regulatory reluctance put pressure on underwriting profitability.

Separately, over the last two days we have met with several InsurTechs at the InsureTech Connect Conference. The focus remains on growth and/or profitability. A discussion or analysis on claims count is usually addressed last. But claims data can provide a great insight into how growth and loss cost trends evolved over a multi-year period.

This also serves as a warning light for the new class of InsurTechs. Even after collecting a meaningful amount of data, some of the larger incumbent carriers still were caught on the wrong end of the loss cost trend shift. At the same time the Insurtech 1.0 class was similarly lacking in terms of delivering any good news in their books.

The analysis over the next few pages uses claims data from Schedule P statutory filings to show that even some of the incumbents read the tea leaves wrong.

With the caveat that any Schedule P analysis is overarching, and trends will differ depending on distribution channels, the analysis below shows how 2021 trends could have resulted in a head-fake for the industry to think that the worse trends were behind it.

Firstly, the double-digit decline in claims counts made it difficult to anticipate the rebound over calendar year 2021.

The table below shows that claims count fell by nearly a quarter over the course of 2020 due to the change in driving behavior during Covid. Note the trend prior to Covid, where first year claims reported remained in a narrower range when growing or declining.

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For calendar year 2020, for the top 10 carriers, on average claims fell 22.4% based on annual schedule P data but rebounded by 18% or so for 2021.

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On a company basis, the trend is distinct, with several carriers’ claims declining by 20%-30% or so, though Progressive’s decline is slightly lower. This should be viewed against the earned premium growth. On a 10-year CAGR basis, Progressive’s earned premiums grew by 10.3% while the rest of the players grew by 2%-4%.

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Taking a step back, Progressive’s decline in claims seems impressive when considering its premium growth, shown below. Progressive posted double-digit growth five years in a row before the pandemic hit.

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Secondly, the divergence in claims inflation severity signals the potential for missteps. 

One of the challenges many personal auto companies faced was how to respond to an eventual rebound in claims following the Covid slump. How does one factor in if this is a new normal or a resumption of trends prior to Covid? Companies who were cautious and immediately responded to an adverse shift in trends did come out better. On the other hand companies who kept on waiting for more data before they could respond ended up playing catch-up.

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Claims inflation severity is computed by taking the net paid losses for a calendar year and dividing by claims closed with payment within that calendar year. This gives a good indication of changes in underlying trends.

The chart below shows again that Progressive, even with its higher premium growth, has seen less runaway claims inflation than most of its peer group. This is most likely a function of Progressive’s telematics, which indicates issues earlier than competitors, and enables the company to pursue rate action before the rest of the cohort.

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Another point to factor in is the different distribution structures and use of telematics, and how quickly claims reporting takes place. Many personal auto players have different capabilities when it comes to how quickly they can turn around a claim and settle it, which is an important factor as delays add to the total costs.

Thirdly, conference call trends show different points in the loss cost response cycle.

Taking a step back, the way companies respond to this shift in loss cost trends as tracked by a shift in claims level is imperative. The last quarter was an interesting reporting period where fears surrounding loss cost inflation reappeared after appearing to stabilize in 2021. In fact, some smaller carriers, such as Cincinnati and Mercury, reported adverse development from prior quarters.

The chart below shows that even among the largest companies, results differed materially coming out of Covid.

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The one positive for the many personal players is that irrespective of 6 months or 12 months policies, this is still a short-tail product. Hence, corrective action will not take several years to permeate the bottom line.

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In summary, this claims count analysis continues to show that reacting late to the adverse trends can end up playing out over several quarters. Not only does it result in delayed corrective action, but also when the cycle turns, carriers who emerge strong will be able to pursue growth faster than the competitors who are always playing catch-up to loss cost trends.

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