Wednesday, April 29, 2009

Competition Still Reigns In Healthy Personal Automobile Insurance Market

The personal auto market remains competitive across the country, even as rates begin to creep upward. Experts in the field said they expect competition to continue throughout the year and into 2010.

As with most other industries, the economy continues to be a factor in the personal auto market. Most observers said this is primarily being seen in the spending habits of consumers, as they forego the purchase of a new car or seek to save on insurance coverage.

In general, though, those in the industry said they have not seen any dramatic change in the marketplace compared to a year ago, and they predict only minor tweaking going forward, rather than any wholesale market shifts.

Insurers are seeing some deterioration in performance in terms of combined ratio, according to Robert Hartwig, president of the Insurance Information Institute, but “not extraordinarily so.” The deterioration, he said, is due to rising claims costs, which in some states has more than offset declining accident frequency.

Accident frequency is down, according to Mr. Hartwig, because people are driving less. Initially, he said this was due to high gas prices. But in the last six-to-nine months, Mr. Hartwig said the economy is the reason.

The economy has also caused consumers to stop buying as many new vehicles. Mr. Hartwig said growth in the personal auto insurance market will slow because the number of new vehicles sold is falling and there are more cars being taken off the road than put on.

Derek Ross, a spokesperson for the Independent Insurance Agents and Brokers of the West and vice president of CM Meirs Co., an independent agency in Woodland Hills, Calif., said he, too, has seen a reduced number of vehicles on the road. At the same time, he said, consumers who are buying are not replacing their old vehicles with vehicles of the same quality. “So we’re seeing a lot of downsizing in the quality” of the types of vehicles on the road.

Speaking to the declining number of vehicles on the road, Mr. Hartwig said, “This has not happened in decades.” He noted there may be a “pent-up demand” for new cars when the economy turns, and he added that insurers will be able to meet that demand when the time comes.

But while experts agree there are fewer new car purchases, not all agree that this necessarily translates to fewer cars on the road. Richard Luedke, spokesperson for State Farm, said people are not buying as many new vehicles, but they are holding onto the cars they have longer, so there is essentially the same number of cars to insure.

Agents have reported some changes in purchasing decisions among consumers because of the economy. James Berliner, vice president of the Professional Insurance Agents of Connecticut and president of Berliner-Gelfand & Co. Inc., a Bridgeport, Conn.-based agency, said consumers are shopping more for insurance and are paying more attention to pricing today.

Paul Monacelli, past president of PIA New Jersey and CEO of Cedar Knolls, N.J.-based ADP/Statewide Insurance Agencies, which writes personal auto in New Jersey, Pennsylvania and New York, said customers are also looking to reduce coverages to save money. They are taking higher deductibles on physical damage, he said.

Mr. Monacelli said he has responded to the shift in consumer buying habits by having longer conversations with customers to ensure they still have enough insurance to protect their assets.
Mr. Ross said he reviews customers who ask questions about reducing costs as if they were new submissions. He said he speaks to these customers about saving money by bundling coverages together and taking advantage of credits for certain levels of education achieved, or certain professions or professional designations.

Insurers are applying these types of credits more liberally than they used to, according to D. Scott Liebert, president of PIA New York and chairman of CLG Insurance, an agency in Nanuet, N.Y. For example, he said he is seeing companies apply credits for renewing coverage early, taking higher limits and owning a home.

Even with consumers shopping more and companies adjusting to compete for business, Mr. Luedke said he has not seen a change in the number of people canceling policies or letting coverage lapse. The lapse and cancellation rate, he said, is about the same it has been for two-to-four years.

Fraud is also a concern for insurers. Mr. Hartwig said there is anecdotal evidence that, because people are struggling financially today, fraud “give up” schemes are on the rise.
Auto theft is also believed to be on the rise, Mr. Hartwig said, particularly in border cities in the United States. He said problems associated with the drug trade in Mexico may be a reason for this rather than the economy.

Despite the economy looming, professionals in this field agreed the personal auto market is still healthy and competitive, with prices remaining relatively stable for the foreseeable future.
Mr. Hartwig characterized the market as “extremely competitive,” and noted a healthy personal auto market is important to the industry’s overall health.

“The number of carriers in some previously difficult-to-operate states is increasing,” such as Massachusetts, Mr. Hartwig said, and residual markets are “virtually depopulated” in many states.

Private passenger auto, he said, currently accounts for 34 percent of all premiums written in United States.

Mr. Monacelli said the market in areas where he writes coverage is “stabilizing.” Up until this year, he said, companies were doing whatever they could to get market share. “They were appointing a lot of agents; sometimes the quality of those agents didn’t meet the profile the companies had in the past,” Mr. Monacelli said.

Companies lived by the mantra that there is a price for every risk, Mr. Monacelli continued, but some of those risks were not necessarily being written at the right prices, casing a deterioration in combined ratios.

The newness of multivariate rating also led to some inappropriate pricing, Mr. Monacelli said. But companies have more experience with this type of rating now, he added, so rates should stabilize some.

Mr. Berliner said insurance company field representatives have warned him that there will be slight rate adjustments upward, but he said this is only being seen in certain regions, not across the board. While other lines are seeing pressure to increase pricing, this has not impacted personal auto, he said.

Rates have been essentially flat according to what Mr. Ross has seen, although he said there has been “some rumblings” about rates beginning to increase. He said he expects some slight increases over the next six months but does not see any landscape-change in the personal auto market.

“Any major changes will happen in baby steps,” he said.

Speaking to State Farm’s experience, Mr. Luedke said rates increased, but only by just under 1 percent.

Mr. Hartwig said the slight adjustment upward in rates is a response to “some underlying increases in costs.” He cited higher medical care costs as an example.

On the regulatory and legislative fronts, Mr. Hartwig said the possibility of some form of federal regulation stands above all other issues. Questions such as whether federal regulation will only be seen as a “systemic risk regulator,” or whether the states or feds will regulate rates, or whether federal regulation will be optional have yet to be answered, he said.

It is also unknown how such changes will affect big insurers versus small insurers, he noted.
Aside from federal regulation, credit scoring remains a “perennial concern,” Mr. Hartwig said. Some states are again talking about bans or restrictions.

Mr. Berliner said a bill has been introduced in his state of Connecticut to ban credit scoring.
Ultimately, Mr. Hartwig said it is incumbent on insurers to make the case for credit scoring and to show that banning the practice will result in an inferior rating system.

The personal auto market remains competitive across the country, even as rates begin to creep upward. Experts in the field said they expect competition to continue throughout the year and into 2010.

As with most other industries, the economy continues to be a factor in the personal auto market. Most observers said this is primarily being seen in the spending habits of consumers, as they forego the purchase of a new car or seek to save on insurance coverage.

In general, though, those in the industry said they have not seen any dramatic change in the marketplace compared to a year ago, and they predict only minor tweaking going forward, rather than any wholesale market shifts.

Insurers are seeing some deterioration in performance in terms of combined ratio, according to Robert Hartwig, president of the Insurance Information Institute, but “not extraordinarily so.” The deterioration, he said, is due to rising claims costs, which in some states has more than offset declining accident frequency.

Accident frequency is down, according to Mr. Hartwig, because people are driving less. Initially, he said this was due to high gas prices. But in the last six-to-nine months, Mr. Hartwig said the economy is the reason.

The economy has also caused consumers to stop buying as many new vehicles. Mr. Hartwig said growth in the personal auto insurance market will slow because the number of new vehicles sold is falling and there are more cars being taken off the road than put on.

Derek Ross, a spokesperson for the Independent Insurance Agents and Brokers of the West and vice president of CM Meirs Co., an independent agency in Woodland Hills, Calif., said he, too, has seen a reduced number of vehicles on the road. At the same time, he said, consumers who are buying are not replacing their old vehicles with vehicles of the same quality. “So we’re seeing a lot of downsizing in the quality” of the types of vehicles on the road.

Speaking to the declining number of vehicles on the road, Mr. Hartwig said, “This has not happened in decades.” He noted there may be a “pent-up demand” for new cars when the economy turns, and he added that insurers will be able to meet that demand when the time comes.

But while experts agree there are fewer new car purchases, not all agree that this necessarily translates to fewer cars on the road. Richard Luedke, spokesperson for State Farm, said people are not buying as many new vehicles, but they are holding onto the cars they have longer, so there is essentially the same number of cars to insure.

Agents have reported some changes in purchasing decisions among consumers because of the economy. James Berliner, vice president of the Professional Insurance Agents of Connecticut and president of Berliner-Gelfand & Co. Inc., a Bridgeport, Conn.-based agency, said consumers are shopping more for insurance and are paying more attention to pricing today.

Paul Monacelli, past president of PIA New Jersey and CEO of Cedar Knolls, N.J.-based ADP/Statewide Insurance Agencies, which writes personal auto in New Jersey, Pennsylvania and New York, said customers are also looking to reduce coverages to save money. They are taking higher deductibles on physical damage, he said.

Mr. Monacelli said he has responded to the shift in consumer buying habits by having longer conversations with customers to ensure they still have enough insurance to protect their assets.
Mr. Ross said he reviews customers who ask questions about reducing costs as if they were new submissions. He said he speaks to these customers about saving money by bundling coverages together and taking advantage of credits for certain levels of education achieved, or certain professions or professional designations.

Insurers are applying these types of credits more liberally than they used to, according to D. Scott Liebert, president of PIA New York and chairman of CLG Insurance, an agency in Nanuet, N.Y. For example, he said he is seeing companies apply credits for renewing coverage early, taking higher limits and owning a home.

Even with consumers shopping more and companies adjusting to compete for business, Mr. Luedke said he has not seen a change in the number of people canceling policies or letting coverage lapse. The lapse and cancellation rate, he said, is about the same it has been for two-to-four years.

Fraud is also a concern for insurers. Mr. Hartwig said there is anecdotal evidence that, because people are struggling financially today, fraud “give up” schemes are on the rise.
Auto theft is also believed to be on the rise, Mr. Hartwig said, particularly in border cities in the United States. He said problems associated with the drug trade in Mexico may be a reason for this rather than the economy.

Despite the economy looming, professionals in this field agreed the personal auto market is still healthy and competitive, with prices remaining relatively stable for the foreseeable future.
Mr. Hartwig characterized the market as “extremely competitive,” and noted a healthy personal auto market is important to the industry’s overall health.

“The number of carriers in some previously difficult-to-operate states is increasing,” such as Massachusetts, Mr. Hartwig said, and residual markets are “virtually depopulated” in many states.

Private passenger auto, he said, currently accounts for 34 percent of all premiums written in United States.

Mr. Monacelli said the market in areas where he writes coverage is “stabilizing.” Up until this year, he said, companies were doing whatever they could to get market share. “They were appointing a lot of agents; sometimes the quality of those agents didn’t meet the profile the companies had in the past,” Mr. Monacelli said.

Companies lived by the mantra that there is a price for every risk, Mr. Monacelli continued, but some of those risks were not necessarily being written at the right prices, casing a deterioration in combined ratios.

The newness of multivariate rating also led to some inappropriate pricing, Mr. Monacelli said. But companies have more experience with this type of rating now, he added, so rates should stabilize some.

Mr. Berliner said insurance company field representatives have warned him that there will be slight rate adjustments upward, but he said this is only being seen in certain regions, not across the board. While other lines are seeing pressure to increase pricing, this has not impacted personal auto, he said.

Rates have been essentially flat according to what Mr. Ross has seen, although he said there has been “some rumblings” about rates beginning to increase. He said he expects some slight increases over the next six months but does not see any landscape-change in the personal auto market.

“Any major changes will happen in baby steps,” he said.

Speaking to State Farm’s experience, Mr. Luedke said rates increased, but only by just under 1 percent.

Mr. Hartwig said the slight adjustment upward in rates is a response to “some underlying increases in costs.” He cited higher medical care costs as an example.

On the regulatory and legislative fronts, Mr. Hartwig said the possibility of some form of federal regulation stands above all other issues. Questions such as whether federal regulation will only be seen as a “systemic risk regulator,” or whether the states or feds will regulate rates, or whether federal regulation will be optional have yet to be answered, he said.

It is also unknown how such changes will affect big insurers versus small insurers, he noted.
Aside from federal regulation, credit scoring remains a “perennial concern,” Mr. Hartwig said. Some states are again talking about bans or restrictions.

Mr. Berliner said a bill has been introduced in his state of Connecticut to ban credit scoring.
Ultimately, Mr. Hartwig said it is incumbent on insurers to make the case for credit scoring and to show that banning the practice will result in an inferior rating system.

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