Rising Auto Costs Ratemaking Seminar Highlights

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The seminar by the Casualty Actuarial Society in 2018, led by James Lynch, Chief Actuary at the Insurance Information Institute, discussed the increasing challenges in the auto insurance industry. Rising accident costs, loss ratios, frequency, and severity trends were analyzed, shedding light on the impact on the P&C sector.

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Rising Auto Costs Ratemaking, Product and Modeling Seminar Casualty Actuarial Society March 21, 2018 James Lynch, FCAS MAAA, Chief Actuary Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5533 jamesl@iii.org www.iii.org

Personal Auto Rising Frequency, Severity Pinching the Largest P/C Line

Auto Net Combined Ratio 115% Commercial Personal 110% 110% 106% 105% 100% 95% 95% 94% 90% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loss Ratios Have Been Rising for a Decade. 2016 Return on Net Worth is Likely Close to Zero or Negative. Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 3

P/C Direct Incurred + ALAE Loss Ratio by LOB LOB 2017 2016 Change From Year Earlier Personal Auto 70 73 -3 Homeowners 75 54 21 GL (incl Products) 65 71 -6 WC 57 62 -5 Fire & Allied Lines 109 51 58 CMP 68 58 10 Comm Auto 76 75 1 Other 66 58 8 Total 65 70 5 Positive Number = Bad News Through Q4. Differences may not add up due to rounding. Sources: NAIC data from S&P Global Intelligence, Insurance Information Institute. 4

Rising Accident Costs All Coverages Affected Increase in Loss Costs, 2015:Q3 2017:Q3 Bodily Injury Property Damage 11.4% Personal Injury Protection 6.4% Collision Comprehensive 12.4% 5.4% 36.6% From 2015 to 2017, the cost of accidents has risen dramatically. By contrast, consumer prices overall rose 3.4 percent during 2015 and 2017. Source: Fast Track Monitoring System. 5

Why Personal Auto Loss Ratios are Rising: Severity & Frequency by Coverage, 2017 vs. 2016 Annual Change, 2017 Over 2016* Severity Frequency 12.0% 10.7% 10.0% 7.6% 8.0% 6.2% 6.0% 4.2% 4.0% 2.0% 0.3% 0.0% -0.1% -2.0% -1.1% -1.1% -2.2% -2.8% PIP -4.0% Bodily Injury Property Damage Liability Collision Comprehensive Frequency Spike Has Lessened. Severity Is Now the Problem. *Four Quarters Ending in September. Source: Fast Track Monitoring System. 6

Claim Trends by Coverage Focus on Collision

Collision Claims: Frequency Trending Higher in 2010s Annual Change, 2006 through 2017 6.0% 4.4% 4.0% 2.0% 1.4% 1.3% 1.2% 0.7% 0.3% 0.2% 0.0% -0.2% -0.7% -0.7% -2.0% -2.6% -4.0% -3.5% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* For a Long Time, Claim Frequency Was Falling, But Since 2010 This Trend Seems to Have Reversed. *Four Quarters Ending in September. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 8

Collision Claims: Severity Trending Higher in 2010-2016 Annual Change, 2006 through 2017 8.0% 6.4% 6.0% 4.7% 3.7% 4.0% 2.9% 2.5% 1.9% 1.6% 2.0% 0.5% 0.2% 0.0% -0.1% -0.9% -2.0% -1.4% -4.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* The Great Recession Helped to Temper Claim Severity, But These forces Have Clearly Reversed, Consistent with Experience from Past Recoveries. *Four Quarters Ending in September. Source: ISO, a Verisk Analytics company; Insurance Information Institute. 9

Whats Driving These Trends? Frequency; Severity; Distraction?

Road Safety Better Economy = More Drivers = More Accidents 14 Percent of Injury Crashes Economic well-being Distracted driving Safety Devices Can Be Expensive Why rates go up Speed Still Kills Expensive auto parts Faster driving Legalized marijuana It s Not Funny Source: Insurance Information Institute research. 11

America is Driving More Again: 2000-2017 Percent Change, Miles Driven* 3.5% 2.6% 2.3% 2.4% 2.5% 2.1% 1.8% 1.5% 1.3% 1.2% 1.2% 0.8% 0.8% 0.6% 0.7% 0.5% 0.4% 0.5% -0.5% -0.6% -0.6% Fastest Growth in More Than a Decade -1.5% -1.9% -2.5% 2001 2003 2005 2007 2009 2011 2013 2015 2017* Tremendous Growth In Miles Driven. The More People Drive, The More Frequently They Get Into Accidents. *Moving 12-month total vs. prior year through December. Sources: Federal Highway Administration; Insurance Information Institute. 12

More Miles Driven => More Collisions Billions of Miles Driven in Prior Year 3,250 Recession Overall Collision Claims Per 100 Insured Vehicles 6.3 Miles Driven (left axis) Collision Claim Frequency (right axis) 3,200 6.2 3,150 6.1 3,100 6.0 3,050 3,000 5.9 2,950 5.8 2,900 5.7 2,850 5.6 2,800 2,750 5.5 08:Q3 16:Q1 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q3 17:Q1 17:Q3 The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher. Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute. 13

Why Are People Driving More Miles? Jobs? Billions of Miles Driven in Prior Year 3,250 Recession Millions Employed 150 Miles Driven (left axis) # Employed (right axis) 3,200 145 3,150 3,100 140 3,050 135 3,000 2,950 130 2,900 125 2,850 2,800 120 10:Q3 17:Q1 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q3 People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement. Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics via FRED; Insurance Institute for Highway Safety; Insurance Information Institute. 14

More People Working and Driving => More Collisions, 2006-2017 Number Employed, Millions 150 Recession Overall Collision Claims Per 100 Insured Vehicles 6.3 Number Employed (left axis) Collision Claim Frequency (right axis) 6.2 145 6.1 6.0 140 5.9 5.8 135 5.7 5.6 130 5.5 5.4 125 5.3 120 5.2 10:Q3 17:Q1 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q3 When People are Out of Work, They Drive Less. When They Get Jobs, They Drive to Work, Helping Drive Claim Frequency Higher. Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Information Institute. 15

Why Are People Driving More Miles? Cheap Gas? Billions of Miles Driven in Prior Year 3,250 Recession Average Price Per Gallon $4.50 Miles Driven (left axis) Gas Prices (right axis) 3,200 $4.00 3,150 3,100 $3.50 3,050 $3.00 3,000 2,950 $2.50 2,900 $2.00 2,850 2,800 $1.50 10:Q3 17:Q1 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 16:Q1 16:Q3 17:Q3 Gas Prices Don t Seem Correlated With Miles Driven. Sources: Federal Highway Administration; Energy Information Administration (All Grades All Formulations Retail Gas Prices); Insurance Institute for Highway Safety; Insurance Information Institute. 16

Comparing Gas Prices, Employment on Collision Frequency Through 2017 Gas Price vs. Collision Frequency Number Employed vs. Collision Frequency 6.10 5.90 5.85 6.00 5.80 Collision Frequency Collison Frequency 5.90 5.75 5.80 5.70 5.65 5.70 5.60 5.60 5.55 5.50 5.50 1.75 2.75 3.75 125 130 Millions Employed 135 140 Gasoline Price per Gallon Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Energy Information Administration; Rolling Four-Qtr Avg. Frequency from Fast Track Monitoring System; Insurance Information Institute. 17

Does Spending on Vehicles Affect Claim Severity? Annual Change, 2005 through 2017 8.0% 8.0% 6.0% 6.0% 4.0% 4.0% 2.0% 2.0% 0.0% -2.0% 0.0% -4.0% -2.0% -6.0% -4.0% -8.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Collision Severity (left scale) Previous 6-yr avg vehicle purchases (right scale) As the Economy Has Gotten Better, People Are Spending More on Vehicles When Those Cars Wreck, Severity Increases. Source: Fast Track Monitoring System; Bureau of Labor Statistics Consumer Expenditure Survey (vehicle purchases net outlay) Insurance Information Institute. 18

Recent Research Variable Importance+ Frequency vs. Drivers per Lane Mile (Q4 2015) Drivers/Lane Mile Urban Avg Commute 140 Rural Avg Commute R = 0.7509 Tort System 120 % Urban VMT Drivers per Lane Mile 100 Rainy Area % Rural VMT 80 Lane Miles 60 Lawyers per Million 40 Avg Miles/Driver Rural VMT/Lane 20 DUIs 0 Urban VMT/Lane 0.00 0.05 On-Level Frequency* 0.10 0.15 0.20 PIP + Ranked by IncNodePurity (change in predictions when a variable is randomly permuted through random decision forest) * Adjusted for miles driven Source:.Auto Loss Cost Trend Report, January 2018 (Casualty Actuarial Society, Property Casualty Insurars Association of America, Society of Actuaries) 19

Severity: Driving Fatalities are Rising Annual Change in Motor Vehicle Deaths 8% 6.7% 6.5% Seatbelt Use Rose to 62% of Drivers, From 49% in 90 Big Drop-off Due to the Great Recession 6% 4% 2% 0% -2% -1.0% -2.4% -4% -3.0% -6% -5.9% -8% -7.0% -9.0% -10% -9.5% -12% 40,000 Deaths in 2016 and 2017 an Everyday Catastrophe Reaching Epidemic Proportions Sources: National Safety Council, Insurance Information Institute. 20

Medical Inflation Heating Up Annual Percent Change, CPI - Medical 5.0% 4.7% 4.6% 4.4% 4.4% 4.2% 4.0% 4.0% 4.0% 3.8% 3.7% 3.7% 3.4% 3.2% 3.0% 3.0% 2.6% 2.5% 2.5%2.4% 2.0% Fastest Growth in More Than a Decade 1.0% 0.0% 2001 2003 2005 2007 2009 2011 2013 2015 2017 Injury Severity Typically Exceeds Medical CPI. Sources: St. Louis Federal Reserve (FRED), Bureau of Labor Statistics Series ID CUUR0000SAM; Insurance Information Institute. 21

Fixing a Bumper . . . On an Entry-Level Luxury Car (~$35K) 2014 Cost vs. 2016 Cost What Has Changed? $3,000 2014 2016 $2,818 2,818 Grille: Distance Sensor $0 $2,500 Headlamp Assembly 394 918 $2,000 Mechanical Labor 0 108 $1,500 1,225 Fewer Accidents, Higher Costs $1,000 733 621 Parts: 130% Higher $500 Labor: 18% Higher $- Parts Labor Total cost: $1,705 higher 2014 2016 2016 vehicle has LED headlights and adaptive cruise control. SOURCE: Liberty Mutual Insurance. 22

What About Distractions? It s A Problem. Is It Growing? What We Do Behind The Wheel But Impact Is Not Clear Percentage of Drivers Who . . Percentage of Crashes Involving Distraction 20% Talking Less . . . . . .Typing More 70% 65% 60% 15% 51% 50% 40% 36% 10% 31% 29% 30% 5% 20% 13% 10% 0% 0% Total Crash 2010 Fatal Crash 2012 Injury Crash 2013 PDO* Crash 2015 Talk on Phone Text Surf the Net 2009 2015 2011 2014 Most Recent Year * Property Damage Only. SOURCES: State Farm, National Highway Transportation Safety Administration (distraction.gov) 23

Weed Spreads Like Wildfire. Insurers Caught in the Middle Current marijuana laws by state Fully legal Medical use legal and recreational use decriminalized Medical use legal Recreational use decriminalized Fully illegal Upcoming vote Change in Collision Frequency, 2012- 2016* Percent WA ME MT VT ND 16 OR 14.0 MN NH ID SD NY WI WY MI 12 PA IA NE NV OH UT IL IN WV 8 CO 6.2 VA MA CA KS MO KY 4.5 RI NC 3.0 TN 4 AZ OK CT AR NM SC NJ MS GA AL 0 TX DE AK LA MD FL DC* * Vs. Neighboring States. HI Sources: National Journal. National Conference of State Legislatures, State Medical Marijuana Laws, November 9, 2015; Stephanie Simon, Marijuana and soda taxes win big, but cigarette taxes fail in several state votes, STAT, November 9, 2016; Ballotpedia, 2018; William Cummings, Pot now legal in DC despite threats from Congress, USA Today, February 25,2015. 24