2015 was a difficult year for auto insurance companies. A huge rise in accidents and payouts, as well as a stagnant bond market have made it likely that carriers will be raising car insurance premiums for drivers in 2016 and 2017.
In the past year more drivers hit the road last year than ever before. Every action has an equal and opposite reaction though, and more drivers also led to more accidents happening--forcing the insurance companies to pay out unprecedented sums in claims.
The number of claims made in 2015 was so high that 14 of the 20 largest insurers saw their loss ratios, or the amount they paid toward claims out of each dollar of premiums, increased from 2014. Of the top 10 auto insurance companies based on market share in the United States, only GEICO, Progressive and Travelers had combined loss ratios of less than 100% -- meaning that policyholder premiums were enough to cover claim payouts and other expenses.
RankLargest Auto Insurance CompaniesCombined Loss Ratio
1State Farm112%
2GEICO98%
3Allstate 101%
4Progressive 94%
5USAA103%
6Farmers 109%
7Liberty Mutual 104%
8Nationwide 110%
9American Family Insurance 106%
10Travelers 97%
Source: SNL Financial
Almost none of the major auto insurers were profitable on their auto insurance premium revenue in 2015. Since they are not profiting from their primary business, the companies have to rely on other types of businesses or investments. Typically, large insurance companies reinvest their profits in bond markets for a fixed income. In the pre-2008 financial crisis world, bonds were a sound investment strategy for companies with capital. Between 2002 and 2007, 10-Year U.S. Treasury Bonds yielded an average 4.6% return. The average 10-Year U.S Treasury bond has yielded 2.6% since 2008, and is a paltry 1.7% as of May 2016. These low interest rates have compressed bond returns.
The situation is dire for companies like MetLife, who hold $350 billion in fixed-income investments. Steve Kandarian, CEO of MetLife, did not hide his pessimistic outlook in his annual shareholders meeting last week, saying, “The macro environment remains extremely challenging and shows little sign of near-term improvement.” The Oracle of Omaha himself, Warren Buffet, shared that sentiment at the Berkshire Hathaway (holding company of GEICO) shareholders meeting as well.
Faced with few options, auto insurance companies may have no choice but to hike rates in the next year or two. In fact, this has already started. In Georgia, Allstate submitted a request to increase rates by 25% by May 22nd -- a nearly unprecedented rate hike. According to Ratefillings.com, 2015 saw rates increase an average of 5.9%; rates have already increase 2.2% in the first quarter of 2016, excluding the potential 25% hike in Georgia. In every state with the exception of California and Wyoming, GEICO has raised rates at least once in the past year. Farmers, who had one of the smaller year to year direct premium growth, but one of the largest combined loss ratios, increased rates by double digits in over 20 states.
The signs point to rate hikes in the near future. As long as there are more drivers on the road, there are going to be more accidents. The Fed appears to be in no rush to increase rates, when other foreign central banks have experimented with negative interest rates. With the bond market compressed, the brunt is probably going to fall on the drivers. If drivers can, renewing policies now before new hikes may be the best way to delay higher future rates.