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U.S. Auto Insurance Market Veers into Underwriting Loss in 2009

Wednesday, October 28th, 2009

The challenges facing the U.S. auto industry throughout 2009, with pressures ranging from the near-collapse of both General Motors and Daimler-Chrysler to various stimulus programs that have attempted to accelerate sales, have received significant attention. A tangential, yet equally important, byproduct of this battle is the fact the auto insurance market is likely to realize an underwriting loss for the year. Faced with lower premiums and higher loss costs, according to FitchRatings’ Auto Insurance Overview, the industry is experiencing the same economic downturn that is affecting the whole economy.

While the increase in loss costs is somewhat expected on a year-over-year basis — as cars become more expensive to repair, labor costs rise and newer cars replace less expensive older cars — the decrease in premium revenue is the direct result of the economic slowdown. At the heart of this issue is the decrease in auto sales – new cars command higher insurance premiums than older cars and net a better return to the insurance companies. As early in the year as January, Reuters was reporting that auto sales in the U.S. were expected to fall by 13 percent, reaching the lowest levels in 27 years — these numbers have worsened since those projections.

The “Cash for Clunkers” program had some impact on accelerating car sales, enticing buyers who may have chosen to wait to buy a new car sooner. However, the crunch felt by the consumer is undeniable. The program was short in duration and may have only been successful in keeping the level of new car sales from decreasing to even lower levels, rather than having a significant impact in boosting sales. Consumers are being more selective with their decreasing levels of disposable income, significantly slowing the rate of new car sales.

Also adding to the decreased underwriting levels, as noted in the same Fitch report, is increased price competition. As insurance companies must fight harder for each dollar, they have been unable to increase auto insurance premiums sufficiently to keep pace with the lower rates they receive on the older vehicles they insure. Furthermore, as consumers are increasingly drawn to the low-cost provider over the high-service provider, online-centric companies have been able to increase their market share and have continued to drive down the overall level of auto insurance premiums. In the current economic environments, pricing power has been decreased across the board, forcing companies in general to be more competitive. With inherently increasing costs, the industry faces a year in which costs will outpace revenues.

The combination of falling revenues — driven by lower new car sales and increased price competition — and rising cots, make it likely that the auto insurance market will report an underwriting loss for 2009.

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