U.S. personal auto industry showing signs of weakening underwriting and operating ratios: A.M. Best

The personal automobile insurance industry in the United States is exhibiting signs of weakening underwriting and operating results, mainly driven by rising loss ratios, according to a new A.M. Best special report.

A.M. Best reached this conclusion in its report, released on Monday, despite the fact that the U.S. personal auto insurance industry experienced net premiums written (NPW) growth of 5.1% in 2015, to US$192.8 billion from US$183.5 billion in 2014.

The Best’s Special Report, titled Personal Automobile – A Challenging Road Ahead, noted that personal auto underwriting results generally have been stable. The market represents the largest component of the U.S. personal lines segment and is a critical line for many insurance companies, especially ones in the private passenger standard automobile composite, where personal automobile comprises over 90% of NPW.

“Nonetheless, underwriting profitability for the personal automobile industry has shown deterioration in recent years, as factors such as rising loss frequency and severity trends, increased competition and weakened economic conditions have all played key roles in the downturn,” A.M. Best said in a press release. According to the ratings firm, the personal auto segment recorded a combined ratio in 2015 of 104.6%, a deterioration of 2.2 points from the previous year.

Several of the leading writers of personal auto insurance have been among the most profitable, although a high market share has not equated to strong level of profitability in all cases, the special report noted. The top 10 groups by NPW accounted for 72% of the industry’s net premium volume in 2015; the top five each generated more than US$10 billion in personal automobile NPW. “While just five of the top 10 groups produced five-year average combined ratios under 100%, most of the top 10 companies have demonstrated operating profitability by producing five-year average operating ratios well below 100%,” the release said.

A.M. Best believes reversing the trend of worsening underwriting results in the face of current market headwinds will be a challenge for personal auto insurers. While higher rates, improved pricing segmentation and claim initiatives may address some of the near-term financial pressure on the line, there are emerging issues that may have more consequential and structural impacts on the personal auto market on a longer-term basis.

Continued technological innovation, the evolution of autonomous vehicles, the rise of Uber and Lyft and the potential growth of non-traditional competitors are just a few of the developments that personal auto insurance companies will need to grapple with in the upcoming years, the report said. “Those companies that can execute on the blocking and tackling aspects of underwriting and claims over the near term, while incorporating the meaningful evaluation of emerging threats into their enterprise risk management framework, will be the most well-prepared for today’s automobile market, as well as the future one.”