COVID-19 and Insurance Economics: Implications for U.S. Personal Auto (Part 1)

The current COVID-19 outbreak and mitigation efforts around the globe have impacted nearly every part of life, and insurance is no exception. While many industry experts have hypothesized about the overall implications for the P&C sector, and insurers are analyzing their books of business, we at Guidewire are extrapolating from transactional data to better understand emerging patterns.

We have focused first on a single implication for P&C insurance during the pandemic: the effects on personal auto lines of business. With vast numbers of people in the United States working from home, sheltering in place, and driving much less, the resulting reduction in exposure from these mitigation strategies is significantly impacting bottom lines for personal auto insurance.

COVID-19 Auto Claims Trends and Insurer Responses in the United States

While staying at home means increased entertainment streaming, puzzle-playing, and family time, it also means less time on the road and fewer miles driven. On March 24, 2020, Arity (an Allstate company) announced that the number of cars on the road was normal through March 10 but dropped more than 25% in the next two weeks. Root Insurance, a mileage-based auto insurer, looked at its own data to find that the miles driven from March 1 through the first half of April was down from 22% to 34% across the 29 states in which the company writes business. Root’s analysis indicated that the shift was due to a decrease in both the number and duration of car trips.

As of April 17, 2020, Chubb, State Farm, Farmers, USAA, Progressive, and Travelers have all announced credits ranging from 15% to 35% on charged monthly premiums. Most insurers are applying the credits to April and May premiums, but we assume that some insurers may extend the credits if circumstances persist. In fact, GEICO has announced 15% credits on the full term of the next policy renewal.

Instead of credits, Allstate (and Esurance), Liberty Mutual (and Safeco), American Family, and Nationwide have announced refunds—cash returned directly to policyholders. The details vary, with Allstate and Liberty announcing 15% refunds for April and May premiums, while American Family and Nationwide are sending $50 per vehicle or policy, respectively.

In the coming months, it will be interesting to see if a market consensus forms around preferred ways of sharing insurers’ savings with customers. But one thing is clear: decisions regarding the size of rebates must be based on data for them to be credible and, indeed, to pass regulatory muster in the states that require it. Certainly, insurers can examine their own claims data between March 1 and mid-April of 2020, but looking at only 1.5 months of data provides only preliminary results. For this reason, we at Guidewire have used one of our business intelligence solutions—Guidewire Compare—to examine the current trends across the broader market.

Analyzing Post-COVID-19 Claims Trends by Using Guidewire Compare

Our analysis with Guidewire Compare shows that the frequency of claims across the U.S. decreased 43% for bodily injury and 47% for physical damage between March 1 and mid-April of this year compared to the same period in 2019. Based on frequency alone, personal auto claims could be decreasing even faster than the mileage numbers suggest.

Insurance economics are also driven by severity. Although based on undeveloped incurred amounts, our analysis of year-over-year claims for this same period suggests that severities in 2020 are up slightly compared to those in 2019.

Interestingly, for claims that were filed from March through mid-April in 2020, the closing rates for both physical damage and bodily injury were up more than 40% from the same period in 2019. This could be because the 2020 claims are less complex, or because claims departments have fewer claims to process—with the result that caseloads per adjuster are smaller and close more quickly.

Of course, every insurer must analyze its own data to understand the implications of COVID-19 mitigation on its business. Our aim at Guidewire is to provide the data platform and analytics tools that provide the insight that leads to smart, agile decision-making.

In part 2 of this blog series, we’ll focus on the implications of COVID-19 for public policies on U.S. auto claims and usage-based auto insurance.