Auto Insurers Boost Premiums on Injury Crash Costs (Update2)
Auto Insurers Boost Premiums on Injury, Crash Costs (Update2)
By Erik Holm
Feb. 8 (Bloomberg) — Allstate Corp. and Progressive Corp.
are leading the push by U.S. auto insurers to raise premiums in
at least 20 states as the $160 billion industry moves to end two
years of price reductions.
Insurers say they need higher prices to counter climbing
repair and medical costs. Allstate, ranked second by premiums,
said collision bills rose 2.2 percent in the fourth quarter from
a year earlier and payouts for injuries gained 9.3 percent.
Safeco Corp., which gets almost half its total premiums from
drivers, reported a $19 million loss on auto underwriting.
The rate adjustment may reverse the 20 percent drop in the
market values of Allstate and Progressive during the past 12
months, said Bear Stearns Cos. analyst David Small. Earnings
should improve this year because insurers have become better at
predicting driving records and then setting prices, he said.
“There;s a lag before rate increases show up on the income
statement,;; said Small, who works in New York. “But it;s real,
it;s happening, and you;ll see it in earnings by the end of the
year.;;
The largest car insurers include No. 1 State Farm Mutual
Automobile Insurance Co., which isn;t publicly traded, and
Berkshire Hathaway Inc.;s fourth-ranked Geico Corp. Bear
Stearns;s Small rates Northbrook, Illinois-based Allstate
“outperform;; with a target of $69 a share, and has a “peer
perform;; rating on Mayfield Village, Ohio-based Progressive.
Allstate fell $1.10, or 2.3 percent, to $46.57 at 4 p.m. in
New York Stock Exchange trading and Progressive fell 16 cents,
or 0.9 percent, to $18.49.
Warren Buffett
“Auto insurance has been surprisingly good for quite
awhile. That;s turning now,;; said Warren Buffett, the
billionaire chairman of Berkshire Hathaway, at an appearance in
Toronto this week. “Frequency of accidents just kept going down
for three or four years, which was just amazing, and the
severity was not particularly bad. Now both are picking up
somewhat.;;
Rising prices for new vehicles and expenses for labor and
replacement parts contributed to a 45 percent increase in car
repair costs during the past decade, according to information
compiled by the Highway Loss Data Institute in Arlington,
Virginia.
Collision costs rose 2.4 percent in the third quarter from
a year earlier, according to data compiled by the Property
Casualty Insurers Association of America in Des Plaines,
Illinois. The cost of auto-body work was up 3.3 percent in 2007,
the U.S. Department of Labor reported.
Hospital Visits
Claims for bodily injuries climbed 6.6 percent in the third
quarter, said PCI, which doesn;t have fourth-quarter data. That
was driven by more expensive hospital visits, which rose 6.7
percent in 2007, according to the Department of Labor.
Auto coverage typically has been a boom-or-bust business,
said Bill Wilt, an analyst at New York-based Morgan Stanley.
When insurers make money, they cut prices to gain market share.
Then, as premiums fail to cover claims, insurers will raise
prices.
This time, insurers are lifting rates before the industry
becomes unprofitable, Small said. If the latest increases stick,
auto insurers may be able to avoid a repeat of 1999, when it
took three years for underwriting to make money again, according
to data compiled by A.M. Best Co.
Safeco;s Loss
Seattle-based Safeco acted too late to avoid losses,
disclosing last week that it spent almost $1.03 in claims and
expenses for every $1 collected in premiums during the fourth
quarter. Rising medical costs contributed to the loss, said
Chief Executive Officer Paula Rosput Reynolds said.
Safeco, ranked 13th by auto premiums, dropped $1.08, or 2.2
percent, to $48.16, bringing the 12-month decline to 28 percent.
“We had a quarter we wouldn;t want to repeat,;; Reynolds
said during a Jan. 31 conference call, referring to the auto
unit. Safeco raised rates in 34 of 44 states in 2007, and is
increasing prices in 18 states in the first quarter.
Small;s analysis found that the country;s six largest
insurers are raising rates or keeping them stable in the top 20
states.
Allstate raised prices for its standard auto coverage in
about two dozen states last year. State Farm applied to increase
prices this year in four states while proposing decreases in
six, after cutting last year in all but one state.
`Huge; Increase
The increase “doesn;t sound like much, but it;s huge;; for
an industry with narrow margins, said Bruce Marlow, president of
New York-based American International Group Inc.;s direct auto
insurance unit and Progressive;s former chief operating officer.
“There just isn;t a lot of room here to get the pricing wrong
for very long.;;
A decade ago, insurers priced policies by putting customers
into about half a dozen categories based on perceived risk of
reporting an accident, Morgan Stanley;s Wilt said. Now insurers
offer thousands of prices tailored to individuals based on
variables such as their credit score or zip code.
Allstate and Safeco also introduced incentives that
discouraged drivers from shopping around, Wilt said. In exchange
for higher premiums, Allstate won;t raise rates when a
policyholder has an accident. Safeco will install global
positioning systems so parents can track their teens.
“Insurers have figured out that if they slash prices, they
can;t necessarily make it up with new customers,;; Wilt said.
“They;re looking for ways to keep customers loyal.;;
To contact the reporter on this story:
Erik Holm in New York at
