What’s driving auto claims costs during pandemic

The long-tail nature of auto bodily injury claims, in addition to insurers’ fixed claims adjustment costs, are among the reasons why insurers are not likely going to reduce auto premiums in proportion to the drop in driving observed during COVID-19.

“I think that the market is not headed for an ongoing rate reduction,” Intact Financial Corp. CEO Charles Brindamour said Thursday of auto. “In fact, I would not call this a soft market by any stretch.”

During a virtual fireside chat Thursday, TD Securities managing director Mario Mendonca asked Brindamour whether the P&C industry might go for a prolonged period of either auto premium reductions or no price increases.

Motorists are driving less because of the COVID-19 pandemic and this will somehow be reflected in rates, said Brindamour. But the impact will be a “taming” of premium increases that would have happened if the pandemic not occurred.

“It’s not like [all Canadian insurers want] to grow [their auto book of business] aggressively. Not at all. I think [insurers] are reflecting in rates what they think driving looks like. There is a regulatory pressure and that’s why rates I think are more stable in this environment.”

In 2020, claims costs did not drop to the same degree as driving, Brindamour warned.

At Intact, auto claims incurred in 2020 were down roughly 10%, while driving was probably down about 20%.

Brindamour’s comments about kilometres driven were based on the data Intact gets from its usage-based insurance clients.

The latest figures from Intact’s telematics program shows driving is down about 13% compared to pre-pandemic levels and has picked up since April 2020, when driving was down about 50%.

“You have to keep in mind loss adjustment expenses – we don’t fire our claims people in a year like 2020,” said Brindamour.

Another major factor is the long-tail nature of liability and accident benefits claims.

Nearly two-thirds of auto claims are from accident benefits and liability coverage, while only about a third are from property damage claims covering repair and replacement of vehicles, Brindamour said May 12 during a conference call discussing Intact’s 2021 Q1 financial results.

“There was more inflation in liability than most people thought, including ourselves,” Brinadmour said of pre-pandemic auto liability and accident benefits claims, during the TD Securities fireside chat on May 13.

Brindamour was alluding to measures Intact started taking in 2017, including rate increases, to improve its auto insurance results. Those measures followed Intact’s $9-million auto underwriting loss in 2016 Q4.

“It took us two-plus years to fix that, and the area where the inflation was coming from was so hard to identify,” Brindamour said. “You need to have super-responsive reserving systems. My perspective is that if you don’t have a sophisticated reserving system, people start to find out about those claims that have been lagging — in particular, basic claims, not small claims — that have the potential to become catastrophic.”

Feature image via iStock.com/Ihor Bulyhin