US auto insurers gain traction on rates, can’t break profit barrier

US automotive insurers have hit high gear on rate increases following the move to underwriting losses I 2022, but may not be able to fully plug the gap until loss severity patterns taper off towards a more sustainable trajectory, analysts at the  Fitch rating agency believe.

“Pricing response has greatly accelerated since second half 2022,” analysts said in a note to markets. “Further material pricing actions in 2023 will foster a reduction in underwriting losses, as will improvements in risk selection practices and expense initiatives.”

“However, a return to market underwriting profits may prove more elusive, as higher inflation and other economic factors continue to increase loss costs,” analysts nonetheless warn. “a tempering in recent unprecedented loss severity patterns is likely needed to move the market back to an underwriting profit position.”

Fitch cites a “sharp deterioration” in performance in 2021-22, having studied the full-year results of 10 public firms accounting for 45% of the market plus the jaw-dropping $13 billion loss for the industry’s top player State Farm. The group of ten public firms suffered a 104% combined ratio, well above the prior two years.

Adverse prior period reserve adjustments have arrived unexpectedly to further mar select P&Ls as severity jumped out of control, Fitch notes.

“Potential for recognition of reserve deficiencies will result in a more uneven pace of recovery among individual carriers,” Fitch warns of the path forward.

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