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Peeking Under the Hood What impact did Mother Nature's wrath and increased repair costs have on auto physicaldamage adjusted loss ratios in 2012?

—October 01, 2013
Peeking Under the Hood What impact did Mother Nature's wrath and increased repair costs  have on auto physicaldamage adjusted loss ratios in 2012?

By Lori Chordas, Senior Associate editor, Best's Review

While more than six million car accidents occur annually in the United States, the overall number of crashes is downshifting.

The cost to repair vehicles, however, is accelerating. In fact, auto repair costs climbed 10% in 2012, the first such increase in six years, according to CarMD, which compiles its annual report based on information gathered from vehicles' onboard computers downloaded by a network of repair shops.

The U.S. national average for car repair costs, reports, is slightly more than $305. Alaskan drivers pay the most for those repairs at an average cost of $353.74, while Mississippi drivers shell out just under $256 on average, per transaction, according to The company analyzed roughly a quarter-million repairs made on vehicles with "check engine" light problems from 1996 to 2010.

The aging of vehicles, along with last year's record heat which impacts cars' fluids, transmissions and cooling systems, likely contributed to the climb in those costs. Mother Nature's powerful punch of hailstorms, hurricanes, wildfires and other weather-related events across the United States also put slight upward pressure on those numbers.

Surprisingly, however, overall total adjusted loss ratios for U.S. writers of auto physical damage remained relatively unchanged, according to A.M. Best Co. Schedule P data.

Best's Schedule P is a database that lets users evaluate the impact of property/casualty insurers' reserving practices based on losses, Loss Adjusted Expenses, Incurred But Not Reported reserves, discounting and claims-made policy information.

The 2012 average auto physical damage adjusted loss ratio for the total U.S. private passenger auto property/casualty industry was 64.83--holding steady from 64.77 in 2011.

The industry saw more of the same on the commercial side. Last year's average total adjusted loss ratio, which is calculated by direct losses incurred divided by the difference between direct premiums earned and dividends to policyholders, was 68.32 for the total U.S. P/C industry, compared to 69.06 the prior year.

Inside the Numbers

It was a bit of a different story, though, for several personal and commercial lines carriers who experienced a teetering in those numbers.

Farmers Insurance Group's average adjusted loss ratio in private passenger auto physical damage, A.M. Best reports, improved from 62.47 in 2011 to 59.99 last year.

Company spokesman Mark Toohey attributes that improvement to "an even greater emphasis and focus on expediting the auto claims repair process by fully utilizing all available channels and resources at our disposal, which, most importantly, improves the customer experience.

"Simply speaking," he said, "one of our primary goals is to create a situation in which a customer can enjoy the experience of dropping off their vehicle, picking up a rental car at the repair shop and, ultimately, knowing that repairs to their vehicle will be done quickly and professionally. This improved efficiency allows us to control expenses and helps us to stabilize pricing, but, most importantly, enhances the overall customer experience."

The company's not alone. Travelers had a 61.70 adjusted loss ratio in private passenger auto physical damage in 2012, an improvement from 67.19 the prior year, according to A.M. Best.

Brian MacLean, president and chief operating officer of Travelers Cos., said in a recent earnings call that the physical damage portion of severity was elevated in the first half of 2012. However, it returned in the second half of the year to near-normal levels.

Travelers' data on the industry shows severity has been creeping upward in the past decade, showing average losses per claim for the industry in 2002 were about $2,500, whereas the figure was about $3,000 in the third quarter of 2012.

As severity has risen, frequency has been trending downward until a few years ago when it bottomed out. MacLean attributed the frequency reduction to advancements in vehicle safety combined with graduated licensing programs for young drivers, which has been offsetting the severity trends.

Berkshire Hathaway Insurance Group, on the other hand, had an average adjusted loss ratio in private passenger auto of 75.51 in 2012, up from 67.10 the year earlier.

Part of those results can be tied to Hurricane Sandy-related claims. The powerful storm was the largest single loss in Geico's history, costing more than three times that of 2005's Hurricane Katrina, Chairman Warren Buffett said in an annual letter to shareholders.

Geico, a wholly owned subsidiary of Berkshire Hathaway, insured about 47,000 vehicles that were destroyed or damaged by Sandy, and Geico's 2012 fourth-quarter losses attributable to the storm totaled $490 million, net of estimate savings, the company reported in a regulatory filing.

In New York--a state hit hard by Sandy--Berkshire Hathaway posted its highest private passenger automobile adjusted loss ratio in at least a decade. In New Jersey, it had below-average experience for the third straight year. The company in both states had record-high adjusted loss ratios for private passenger auto physical damage, but lower figures in the significantly larger liability portion of private passenger auto.

Weather Alerts

Weather-related events certainly took a toll on auto physical damage adjusted loss ratios in 2012.

Hurricane Sandy, along with extreme winter conditions, packed a powerful punch across the United States, said Robert Passmore, senior director of personal lines policy for the Property Casualty Insurers Association of America.

Several hailstorms also hit the country, including an outbreak of storms in Colorado in June that caused more than $1 billion worth of damage.

But, said Greg Horn, vice president of industry relations for property/casualty claims technology solutions provider Mitchell, hail-related claims weren't as severe as what the industry experienced in prior years.

"On that side, we had low average repair severity and that helped offset the impact of Sandy and the quarter-million cars totaled in the storm."

Sandy, whose tropical storm-force winds at landfall spanned 943 miles of the U.S. coast, was perhaps one of the biggest blows ever to the industry. According to the National Insurance Crime Bureau, the storm caused insured damage to more than 250,000 vehicles in 16 states, based on claims processed by insurers. Vehicles in New York and New Jersey accounted for about 84% of the insured damage, and the level of sustained damage varied from paint damage to water submersion.

Private passenger auto insurers in New York and New Jersey reported significant jumps on the physical damage side in 2012. New York's average adjusted loss ratio figure was 101.54, compared to 72.02 in 2011. New Jersey's went from 61.32 in 2011 to 81.64 the following 12 months, according to BestLink, A.M. Best's online financial system.

Zurich North America Direct Markets, the leading writer of franchise auto dealers, certainly felt the impact of Sandy. "Last year we really had 364 good days and one bad day," said David Putz, senior vice president and head of direct markets for the Schaumburg, Ill.-based company. "Clearly, there were other losses throughout the course of the year, but Sandy was one event that really flipped the results from all trends looking good in auto physical damage for our Direct Markets unit to a difficult year."

Salvage rates, he added, also took a big hit, due in part to saltwater damage and erosion to cars and "the industry being left with a high concentration of flood vehicles." Commercial lines carrier Zurich Financial Services North America Group had a 98.79 average adjusted loss ratio in 2012, over 70.73 the prior year.

Other Driving Forces

Aging vehicles also had a hand in last year's auto physical damage adjusted loss ratio numbers, Horn said. "The age of a car being repaired is now about seven-and-a-half years old. That's just when there starts to be an influx of additional air bags, more expensive equipment and aluminum or alloy construction," he added. "When dual air bags started to be put in cars in the early 2000s, we started to see a real influence in collision repair rates. Now we're starting to see side air bags, knee bolster air bags and more supplemental air bags on top of the initial driver and passenger dashboard sites."

The way that trickles down into the industry, Horn said, is through higher end luxury cars. "Carriers with preferred books of business that insure, let's say, more Mercedes than Chevrolets will see the impact sooner than other carriers will."

Passmore said many of today's vehicles on the road are more than a decade old. "Those older cars can become total losses easier, so that's all reflected in loss ratio numbers."

In addition, "cars contain more sophisticated technology and even the materials used to build them are more sophisticated and more expensive to repair," he added. "Parts that used to be repaired now often have to be replaced. However, while the cost of repairs might be edging up, fewer accidents tends to temper those effects."

Westfield Group, whose 2012 private passenger average adjusted loss ratio improved from 63.79 in 2011 to 55.07 last year, attributes part of that trend to continued enhancements of auto safety features, said Dave Peterson, national personal lines and small business accounts leader.

He also points to higher unemployment rates leading to fewer miles being driven annually and graduated licensing of young drivers as driving the trend. "We've been pricing to expected profit targets for all lines and coverages over the last few years," he said.

"All of these factors are contributing to reduced frequency and severity of loss. In addition, our pure premium trends for comprehensive and collision have risen since 2009."

Auto parts also factor into the mix. "There's been much pressure to fight parts price increases by selecting cheaper alternative parts, and additionally a lot of large carmakers put more parts on their 'Beat the Competition' programs where they would match the price of an aftermarket part in order to sell that OEM new part," noted Horn. "We saw that have an overall effect on the outlay for parts of average repairable vehicles."

Perhaps one of the largest changes the industry has seen is a softening of used-vehicle values, he added. In 2009, sales of new vehicles in the United States were the lowest in a decade, which catapulted used-car values higher as financial institutions restricted leases and rental cars, and fleet companies kept vehicles in service longer, Horn said. "Fewer late-model vehicles available meant resale values for used vehicles rose across the board."

What that meant for repair numbers from 2009 to mid-2012, he said, "is that instead of being declared total losses, more vehicles now fell into the repair category. The interesting thing is that there's never really one silver bullet; rather, it's a couple of moving pieces.

For example, eight years ago a BMW 5 series front end was constructed of mild steel. Today, that's replaced with an aluminum structure--something much more costly to repair."

Accelerating Forward

This year, said Rich Attanasio, a vice president in A.M. Best's property/casualty rating division, carriers likely can expect to see more of the same when it comes to adjusted loss ratios of auto physical damage claims.

"We don't expect any significant changes from a loss perspective; companies are continuing to take modest rate increases," he added.

"If there is a significant event, that could change this a little," Attanasio said. "But in order to move those numbers on a national level, it would take a pretty significant trend across the entire U.S. population." Two things set to change, however, are cars and parts themselves, said Passmore.

"I think cars and materials will continue to become more and more sophisticated. I think over the long term, the average cost of repairs will probably continue to rise; however, accident trends will likely decrease even though people may be driving more.

"Now what we'll see are more collision avoidance systems coming into the vehicle fleet," he added.

"Air bags and anti-lock brakes started out in more expensive cars and eventually made their way through the fleet into more economical vehicles. Anti-collision avoidance technologies will likely have the same effect. And that could factor into auto physical damage adjusted loss ratios going forward."

Published in Best’s Review, October 2013

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