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repair costs. With access to needed parts, and—just
as important—qualified labor limited, the cycle
time for repairs has grown considerably, resulting in
additional loss cost pressures. According to the St.
Louis Federal Reserve, cost increases for the auto
industry aren’t limited to just microprocessors, given
that the cost of automotive parts overall rose 13.3%
in 2022.
The growing use of telematics and usage-based
insurance may help address loss frequency, as
insurers can measure driving behavior or implement
additional product innovations such as per-mile
insurance. However, this is unlikely to have a
meaningful impact over the near term.
Given the persistence of high loss costs, a return
to underwriting profitability for the auto segment
over the near term appears highly unlikely. However,
insurers remain vigilant in their pursuit of rate
adequacy in response to loss cost pressures and have
benefited from the implementation of technology,
which has resulted in greater efficiency.
Restrictive Regulatory Environment
The regulatory environment remains an important
consideration when evaluating market conditions.
Before the heightened inflationary pressures, carriers
were generally able to address rate needs with modest
rate increases. Accordingly, the regulatory response to
rate adequacy needs had not been a significant barrier
to generating adequate operating results.
However, the magnitude of increases has grown,
along with challenging trends in the broader
economy. Global supply chain issues and rising
labor costs have resulted in stubbornly persistent
inflation, which led to the Federal Reserve raising
the federal funds rate by 425 basis points in 2022
and an additional 50 basis points in the first
quarter of 2023, to a range of 4.75% to 5.00%,
with additional increases possible throughout
2023. As a result, the ability to consistently
generate adequate operating results has been
challenged. Inflationary trends will eventually
plateau, but how long this environment will
continue remains uncertain.
Persistent Investment Market Volatility
On top of the challenges associated with the
inflationary environment and its impact on auto
writers, investment market volatility has also
pressured results. Insurers whose capital cushion
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allows them to absorb capital volatility may be less
affected by the volatility in investment portfolios.
However, results will vary by insurer depending
on the composition, duration and maturities of
individual portfolios.
Strong Capital Positions
Despite these ongoing operating challenges
and volatile investment markets, U.S. personal
auto carriers, on the whole, maintain favorable
risk-adjusted capitalization. In addition, liquidity
remains fairly strong across the segment. However,
the risk-adjusted capitalization of a number of
personal auto carriers in the segment deteriorated in
2022, driven by increased underwriting losses and
unrealized capital losses. Additionally, estimated
loss reserve adequacy for the personal auto liability
segment deteriorated to 0.3% deficient at year-end
2022, from 2.0% redundant at year-end 2021.
Nevertheless, their risk-adjusted capitalization
remains largely favorable due to the solid retained
earnings generated over the past five years from
profitable operating results, which enabled them to
strengthen their capital base.
Digital Transformation/Technology
Adoption
Historically, the personal auto line has led
the charge in the insurance industry in terms of
technology and the move to digitization, facilitated by
the inherent nature of the product. For many years,
there has been a push toward leveraging technology
throughout entire organizations, including claims,
underwriting and distribution. In addition, most
companies have updated their legacy systems. As a
result, these innovation efforts have led to improved
efficiencies and enhancements to the customer
experience.
As the use of technology increases across the
broader financial services landscape, companies will
continue to look for ways to meet higher customer
expectations. For some, these technology adoptions
are developed internally. For others, the use of third-
party partners has been the preferred route. In any
case, those companies that can’t meet increasing
customer expectations will be at a competitive
disadvantage. The fostering of innovation in all
operational phases and in risk management protocols
will continue to benefit personal auto writers as they
focus on achieving adequate rate levels.
What AM Best Says