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OLDWICK - JULY 10, 2017 12:34 PM (EDT)
Sharp underwriting and operating declines in the U.S. nonstandard automobile market have been reflective of escalating repair and medical costs, as well as deteriorating highway infrastructure combined with increased miles driven, according to a new A.M. Best special report.
The Best’s Special Report, titled, “Despite Top Line Growth, U.S. Nonstandard Auto Results Continue to Deteriorate,” states that the results for the population of private passenger nonstandard auto (PPNSA) insurance companies followed in this report has been deteriorating for a decade, but more so in the past two years, as the loss and loss adjustment expense ratio (LAE) in 2015 and 2016—78.4 and 81.1, respectively—was higher than the five- and 10-year averages. In 2016, the loss and LAE, combined, and operating ratios all declined to their worst levels in a decade. In particular, the performance of small, regional and single state writers has suffered due to persistent competition from large standard auto writers, a rise in loss severity, fraud and limited scale and technological advances. Over the last few years, technological capabilities and greater scale have allowed larger standard auto writers to target the more profitable insureds in this marketplace, leaving the riskier policies to smaller nonstandard auto writers.
According to the report, rate increases in a number of states aiming to combat deteriorating loss trends, and increases in new car purchases spurred by economic growth have helped premium levels rise, but these factors also have caused an increase in the insurers’ net and gross underwriting leverage.
Nonstandard auto policies typically are offered to drivers subject to risk factors that exceed those defined by a traditional auto insurance policy, making it difficult, if not impossible, to obtain insurance at standard or preferred rates. These policies are highly customized to policyholders’ specific needs and pricing and terms can vary widely. Establishing and maintaining an online distribution presence has been critical to enhancing the nonstandard auto insurers’ competitiveness, and this has led to higher expense ratios than that of the standard auto market. In addition, nonstandard auto premiums generally decline during recessionary periods, with the resulting drop in the premium base hurting profitability.
Single-state or regional PPNSA writers lacking scale and effective risk and expense management capabilities will find it difficult to operate successfully in this market, as well as defend their market share and improve operating results. Challenges will be more acute for smaller, less advanced PPNSA companies. The most technologically advanced companies that combine capabilities with proven underwriting acumen and efficient operations—will have the best chance to succeed and remain in the market over the long term.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=263452 .
A.M. Best is the world’s oldest and most authoritative insurance rating and information source.