Rising Auto CostsCasualty Actuarial Society Annual Meeting

November 7, 2017

James Lynch, FCAS MAAA, Chief Actuary

Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5533 jamesl@iii.org www.iii.org

Personal Auto

Rising Frequency, Severity Pinching the Largest P/C Line

3

Auto Net Combined Ratio

Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence;Insurance Information Institute.

Loss Ratios Have Been Rising for a Decade. 2016 Return on Net Worth is Likely Close to Zero or Negative.

94%

110%

95%

106%

90%

95%

100%

105%

110%

115%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Commercial Personal

4

P/C Direct Incurred Loss Ratio by LOB

Through Q2. Differences may not add up due to rounding.

Sources: NAIC data from S&P Global Intelligence, Insurance Information Institute.

LOB 2017 2016 Change From Year Earlier

Personal Auto Liab 70 72

Homeowners 64 56

PhysDam (PA, CA) 65 67

GL (incl Products) 54 52

WC 54 54

Fire & Allied Lines 53 57

CMP 53 51

Comm Auto Liab 66 64

Other 48 45

Total 61 59

(2)

8

(2)

3

0

(4)

2

2

3

1

Positive Number = Bad News

5

Rising Accident Costs

Source: Fast Track Monitoring System.

From 2015 to 2017, the cost of accidents has risen dramatically. By contrast, consumer prices overall

rose 3.3 percent during 2015 and 2016.

Increase in Loss Costs, 2015:Q2–2017:Q2

Bodily Injury

14.1%

Property

Damage

14.0%

Personal Injury

Protection

13.2%

Collision

11.1%

Comprehensive

25.4%

All Coverages Affected

6

Why Personal Auto Loss Ratios are Rising: Severity & Frequency by Coverage, 2017 vs. 2016

*Four Quarters Ending in June.

Source: Fast Track Monitoring System.

Frequency Spike Has Lessened. Severity Is Now the Problem.

7.7%

4.2%3.2%

2.1%

11.1%

-1.1%

0.6%

-2.8%

2.2%

-1.1%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Bodily Injury Property DamageLiability

PIP Collision Comprehensive

Severity FrequencyAnnual Change, 2016 Over 2017*

Claim Trends by Coverage

Focus on Collision

8

Collision Claims: Frequency TrendingHigher in 2010s

Annual Change, 2006 through 2017

*Four Quarters Ending in June.

Source: ISO, a Verisk Analytics company; Insurance Information Institute.

For a Long Time, Claim Frequency Was Falling, But Since 2010 This Trend Seems to Have Reversed.

3.1%

-1.9%

-2.8%

-1.2%

0.9%

-0.2%

0.2%

4.6%

1.4%0.8%

2.2%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

9

Collision Claims: Severity Trending Higher in 2010-2017

Annual Change, 2006 through 2017

*Four Quarters Ending in June.

Source: ISO, a Verisk Analytics company; Insurance Information Institute.

The Great Recession and High Fuel Prices Helped to Temper Claim Severity, But These forces Have Clearly Reversed,

Consistent with Experience from Past Recoveries.

4.1%

-0.5%-0.8%

-2.8%

-1.7%

1.7%

3.1% 2.5%

1.7%

4.1%

5.7%

2.1%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

What’s Driving These Trends?

Frequency; Severity; Distraction?

11

Road Safety

Source: Insurance Information Institute research.

Distracted driving

Faster driving

Economic well-being

Legalized marijuana

Expensive auto parts

Safety Devices Can Be

Expensive

Better Economy = More Drivers

= More Accidents

18 Percent of Injury Crashes

Speed

Still

Kills

It’s Not Funny

Why rates go up

12

America is Driving More Again: 2000-2017Percent Change, Miles Driven*

*Moving 12-month total vs. prior year through March. Sources: Federal Highway Administration; Insurance Information Institute.

1.7%

2.1%

1.5%

2.2%1.9%

1.0%

0.4%0.3%

-2.1%

-0.3%

0.8%

-0.3%

0.1%

0.6%

1.9%

2.7%

1.9%

2001 2003 2005 2007 2009 2011 2013 2015 2017*

-2.5%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

Fastest Growth in More Than a

Decade

Tremendous Growth In Miles Driven. The More People Drive, The More Frequently They Get Into Accidents.

13

More Miles Driven => More CollisionsBillions of Miles Driven in Prior Year

Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute.

The More Miles People Drive, the More Likely They are to Get in an Accident, Helping Drive Claim Frequency Higher.

5.5

5.6

5.7

5.8

5.9

6.0

6.1

6.2

2,750

2,800

2,850

2,900

2,950

3,000

3,050

3,100

3,150

3,200

3,250

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15

:Q1

15

:Q3

16

:Q1

16

:Q3

17

:Q1

Miles Driven (left axis)

Collision Claim Frequency (right axis)

Overall Collision Claims Per 100 Insured Vehicles

Recession

14

Why Are People Driving More Miles?Cheap Gas?Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration; Energy Information Administration (All Grades All Formulations Retail Gas Prices); Insurance Institute for Highway Safety; Insurance Information Institute.

Gas Prices Don’t Seem Correlated With Miles Driven.

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

2,800

2,850

2,900

2,950

3,000

3,050

3,100

3,150

3,200

3,250

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12:Q

3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15:Q

1

15

:Q3

16

:Q1

16

:Q3

17

:Q1

Miles Driven (left axis) Gas Prices (right axis)

Average Price Per Gallon

Recession

15

Why Are People Driving More Miles?Jobs?Billions of Miles Driven in Prior Year

Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics via FRED; Insurance Institute for Highway Safety; Insurance Information Institute.

People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement.

120

125

130

135

140

145

150

2,800

2,850

2,900

2,950

3,000

3,050

3,100

3,150

3,200

3,250

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12:Q

3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15:Q

1

15

:Q3

16

:Q1

16

:Q3

17

:Q1

Miles Driven (left axis) # Employed (right axis)

Millions Employed

Recession

16

More People Working and Driving=> More Collisions, 2006-2017Number Employed, Millions

Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Information Institute.

When People are Out of Work, They Drive Less. When They Get Jobs,They Drive to Work, Helping Drive Claim Frequency Higher.

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

6.0

6.1

6.2

120

125

130

135

140

145

150

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12:Q

3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15:Q

1

15

:Q3

16

:Q1

16

:Q3

17

:Q1

Number Employed (left axis)

Collision Claim Frequency (right axis)

Overall Collision Claims Per 100 Insured Vehicles

Recession

17

Comparing Gas Prices, Employment onCollision Frequency Through 2017

Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Energy Information Administration; Rolling Four-Qtr Avg. Frequency from Fast Track Monitoring System; Insurance Information Institute.

Gas Price vs.

Collision Frequency

Number Employed vs.

Collision Frequency

5.50

5.55

5.60

5.65

5.70

5.75

5.80

5.85

5.90

5.95

6.00

6.05

1.75 2.75 3.75

Co

llis

ion

Fre

qu

en

cy

Gasoline Price per Gallon

5.40

5.50

5.60

5.70

5.80

5.90

6.00

6.10

6.20

125 130 135 140 145 150

Co

llis

on

Fre

qu

en

cy

Millions Employed

18

Severity: Driving Fatalities are RisingAnnual Change in Motor Vehicle Deaths

Sources: National Safety Council, Insurance Information Institute.

-7.0%

-5.9%

-3.0%

-9.5%

-9.0%

-2.4%

6.7% 6.5%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Driving Has Been Getting Safer for Decades, But Recent Trend is Discouraging—40,000 Deaths in 2016.

Seatbelt Use Rose to 62% of Drivers, From 49% in ‘90

Big Drop-off Due to the Great Recession

19

Medical Inflation Heating UpAnnual Percent Change, CPI - Medical

*First Half vs. Year Earlier. Sources: St. Louis Federal Reserve (FRED), Bureau of Labor Statistics Series ID CUUR0000SAM; Insurance Information Institute.

4.6%4.7%

4.0%

4.4%4.2%

4.0%

4.4%

3.7%

3.2%3.4%

3.0%

3.7%

2.5% 2.4%2.6%

3.8%

3.2%

2001 2003 2005 2007 2009 2011 2013 2015 2017*

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Fastest Growth in More Than a

Decade

Injury Severity Typically Exceeds Medical CPI.

20

Does Spending on Vehicles Affect Claim Severity?

Annual Change, 2005 through 2017

Source: Fast Track Monitoring System; Bureau of Labor Statistics Consumer Expenditure Survey (vehicle purchases – net outlay) Insurance Information Institute.

As the Economy Has Gotten Better, People Are Spending More on Vehicles – When Those Cars Wreck, Severity Increases.

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Collision Severity (left scale) Previous 6-yr avg vehicle purchases (right scale)

21

Fixing a Bumper. . . On an Entry-Level Luxury Car (~$35K)

2016 vehicle has LED headlights and adaptive cruise control.

SOURCE: Liberty Mutual Insurance.

What Has Changed?

Fewer Accidents, Higher Costs

2014 Cost vs. 2016 Cost

1,225

621

2,818

733

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Parts Labor

2014 2016

2014 2016

Grille: Distance Sensor $0 $2,818

Headlamp Assembly 394 918

Mechanical Labor 0 108

Parts: 130% Higher

Labor: 18% Higher

Total cost: $1,705 higher

22

What About Distractions?It’s A Problem. Is It Growing?

* Property Damage Only.

SOURCES: State Farm, National Highway Transportation Safety Administration (distraction.gov)

What We Do Behind The Wheel But Impact Is Not Clear

65%

31%

13%

51%

36%

29%

0%

10%

20%

30%

40%

50%

60%

70%

Talk on Phone Text Surf the Net

2009 2015

. . .Typing More

Percentage of Drivers Who . .

0%

5%

10%

15%

20%

TotalCrash

FatalCrash

InjuryCrash

PDO*Crash

2010 2011 2012 2013 2014 2015

Percentage of Crashes Involving Distraction

Talking Less . . .

Most Recent Year

23

Weed Spreads Like WildfireInsurers Caught in the Middle

SOURCE: Highway Loss Data Institute.

14.0

6.2

4.53.0

0

4

8

12

16

Change in Collision

Frequency, 2012-2016*

Percent

* Vs. Neighboring States.