OII backgrounder: Auto insurance outlook
(3/05)

According to the National Safety Council, the cost of crashes in the US in 2003 is estimated at $240.7 billion. Costs include wage and productivity losses, medical expenses, administrative expenses, motor vehicle property damage and employer costs.

Auto insurance premium trends and 2005 projections

Auto insurance premium increases, which have become part of the national landscape over the past few years, show signs of stabilizing. The Insurance Information Institute (III) reports the cost of auto insurance is expected to rise by 1.5 percent in 2005, the smallest increase in five years.

The average cost for auto insurance nationwide is estimated at $870 -- an increase of $13 per vehicle from last year, according to the III. The projected increase represents a continued slowdown from 2004 when auto insurance expenditures rose 2.8 percent. The average US auto insurance premium in 2004 was $857.

NOTE: III’s 2005 US auto insurance report is available online at: www.iii.org/media/industry/additional/2005autooutlook/.

According to previous III reports, the auto insurance premium decreases of 2.8% in 1998 and 3.2% in 1999 were the first and last since 1973. In 2000 premiums began to creep up. US auto insurance premiums rose on average about 7.5% in 2002 and 7.8% in 2003.

Ohio auto insurance premiums, historically lower than the US average, have been on the rise at a slower pace than the US average. According to the Ohio Department of Insurance, the top 10 auto insurance writers in the Buckeye state (about 72% of the Ohio market) averaged a 4% increase in premiums in 2002 and 4.6% in 2003. The 2004 auto rate increase was .2%, translating to less than $2.00 per insured vehicle in the state.

Table 1 provides the average auto insurance expenditures for 1995-2002 and the outlook in Ohio and the US through 2005. (The average insurance expenditure measures what consumers actually spent for insurance per insured vehicle.)

TABLE 1: Average auto insurance expenditures in Ohio and US, 1995–2002 and projections through 2005

Sources:
1995–2002 US data: Insurance Information Institute and the National Association of Insurance Commissioners

1995–2002 Ohio data: National Association of Insurance Commissioners 2001–2003 studies, "State Average Expenditures and Premiums for Personal Automobile Insurance.” Average auto insurance premium is the state average premium expenditure, which is the total written premium divided by liability premium car-years. A car-year is equal to 365 days of coverage for a single vehicle. The information is from Table 2 in the NAIC reports.

2003–2005 US estimates: Insurance Information Institute based on data from the National Association Insurance Commissioners

2003–2004 Ohio estimates: Ohio Insurance Institute estimates based on data from the Ohio Department of Insurance

Auto insurance profitability trends

From a profitability standpoint, auto insurers, on average, paid out more than they collected in premiums between 1993-2002, but experienced less volatility than other lines such as homeowners and commercial auto, and medical malpractice. A study by the National Association of Insurance Commissioners (NAIC) finds US auto insurers paid out an average of three cents on the dollar more than collected during the past decade, compared to one cent on the dollar more in Ohio. What this means is that for every dollar collected in auto insurance premiums between 1993–2002, auto insurers nationally paid out $1.03. For the same years, Ohio insurers paid out an average of $1.01. See Table 2 for 1993–2002 US and Ohio profitability comparisons by year.

TABLE 2: US and Ohio profitability–Private passenger auto insurance, 1993–2002

* For every dollar collected in auto premiums, the amount shown was paid out that year

Source: National Association of Insurance Commissioners “Profitability by Line by State 2002,” December 2003

Factors affecting auto premiums

Vehicle owners understand that their personal driving record and that of their families, the type of vehicle they drive, how much they drive, age and marital status, and their credit-based insurance score influence the cost of auto insurance. Yet rising medical costs, higher vehicle repair costs and soaring jury awards in vehicular liability cases are some of the principle causes for higher auto insurance rates today.

• Medical costs affect what insurers pay in claims. The $15–$20 billion that auto insurers pay in medical claims each year is a very significant component of auto insurance costs and its upward trend. Injuries occur in about two million crashes each year; many of which include multiple injuries. Typical costs for treating an auto crash victim range from $6,000 to $9,000 but can easily run into the tens of thousands of dollars.

Costs related to physician services rose 12.9% between 1998–2002, according to the US Department of Labor, Bureau of Labor Statistics. Ohio’s average per diem hospital costs rose 13% ($1,261.60 to $1,425.95) during the same five-year period, according to the American Hospital Association (www.ohioinsurance.org/factbook/2003-04/chapter1/chapter1_e.shtml).

• Higher repair costs significantly affect premiums. A 1999 court decision essentially forced many insurers to suspend use of non-original equipment manufacturer (non-OEM or aftermarket) crash parts in automobile repairs, giving manufacturers of name-brand parts a virtual monopoly in this multi-billion dollar market. The effective prohibition on the use of aftermarket parts—which are of like kind and quality to name brand parts—in the repair of damaged vehicles is a factor that could ultimately add $4 to $5 billion annually to the cost of auto insurance. Name brand parts can cost up to 60% more than their non-OEM equivalent, according to the Alliance of American Insurers. (www.ohioinsurance.org/factbook/2003-04/chapter1/chapter1_l.shtml)

The cost of vehicle repair (body work) in the US rose 10.5% between 2000–2004, according to body work repair costs from US Department of Labor, Bureau of Labor Statistics. Ohio’s average auto labor repair costs rose an average of 13.5% between 2000–2004, according to an OII study (www.ohioinsurance.org/factbook/2003-04/chapter1/chapter1_k.shtml).

• Auto theft is another significant factor that affects rates. According to preliminary data from the Federal Bureau of Investigation’s Uniform Crime Report, the number of auto thefts rose by 1.1 percent between 2002-03, the fourth consecutive year of increased theft activity.

OII estimates that statewide auto thefts decreased 1.9% between 2002–2003. The value of unrecovered vehicles in 2003 exceeded $103.7 million.

• Increased costs for legal defense: According to III, lawsuits affect the cost of insurance and the products and services of the industries sued. Tillinghast, an actuarial consulting firm, reports that the American civil liability (tort) system cost $233 billion in 2002, a $27.4 billion rise from the previous year.

Most lawsuits are settled out of court. Of those that are tried and proceed to verdicts, Jury Verdict Research data show that in 2002 the median award for plaintiffs’ verdicts in personal injury cases fell to $30,000 from almost $43,000 in 2001 and $45,000 in 2000. However, insurers’ defense costs as a percentage of incurred losses are going up. Cases are becoming more complex; insurers are spending more money to defend individual cases; and the cost of defending certain types of lawsuits such as asbestos cases are increasing, among other things.

• Court judgments: State law requires that auto insurance premiums be adequate to cover anticipated losses, many of which insurers are able to calculate; some however cannot. The unpredictable nature of Ohio court rulings can affect what we pay for insurance under the terms and conditions of the policy.

Two prominent Ohio Supreme Court Cases, Scott-Pontzer v. Liberty Mutual Fire Insurance Co. (June 1999) and Linko v. Indemnity Insurance Co. of North America (December 2000) are expected to cost Ohio insurers at least $1.5 billion in additional claims for which no premiums were assessed or collected.

• New cars costs: According to Ward’s Motor Vehicle Facts & Figures 2003, the average new car expenditure rose 5.3% between 1998–2002. The more expensive the car, the more it typically costs to insure.

Factors benefiting Ohio consumers

• Affordable full coverage: The cost of full auto insurance coverage in Ohio is extremely affordable. Although liability coverage or a bond issued by the state or an insurer satisfies the basic requirements of Ohio’s financial responsibility law, many consumers opt for full coverage (liability, collision and comprehensive coverages). This is especially true of those owning newer vehicles.

Another way to view the cost of insurance is to compare the “combined average premium.” This figure reflects the basic auto insurance premium charged for an average car including liability, collision and comprehensive coverages. Based on the 2002 NAIC auto insurance study released in September 2004, Ohio’s combined average premium is lower than all but nine states. According to the study, Ohioans paid an average of $713.67 for full coverage auto insurance in 2002, which is over $166 less than the national average of $879.99.

• Hundreds of companies vying for business: According to A.M. Best data for 2003 no other state has more private passenger auto insurance providers than Ohio. In 2003, there were 416 companies licensed to write personal lines auto insurance in the Buckeye state, with Ohio’s total auto premium volume ranking ninth in the nation.

• Stable regulatory environment promotes competition among insurers, which helps keep premiums affordable. Competition in Ohio among insurers has suppressed premium increases to a degree and as a result, consumers haven’t been subjected to rate hikes as severe as in other parts of the country.

• Auto insurance laws: Ohio’s financial responsibility law provides options other than insurance to comply with state law. This is not the case in pure compulsory auto insurance states. Most Ohio drivers comply with the law through auto insurance. In pure compulsory insurance states, consumers have fewer insurer choices and competition is often more limited.

Also see:
Auto insurance savings tips:
www.ohioinsurance.org/factbook/2003-04/chapter1/chapter1_t.shtml