Why auto lines are looking good these days

Long the bane of the industry, auto insurance is seeing a reversal in fortunes and will witness dramatic savings due to the COVID-19 pandemic — at least temporarily.

One ‘auto immunity’ model estimates over $500 million in industry savings in the first quarter of 2020 alone. Looking at the six-month model that assumes the shutdown will ease by the end of May, the industry will save almost $1.8 billion in the first half of 2020 — well over the total underwriting income the industry saw in 2019.

“Though the modelled savings seem large, it is important to remember two things,” Joel Baker, president and CEO of MSA Research, told Canadian Underwriter following the release of the MSA Quarterly Outlook Report Q4-2019. Included in the report was the article Auto Immunity – A Silver Lining Amid COVID-19, which outlined the modelled estimates.

The first is that this is just a model and as such, is subject to variation and substantial uncertainty. The second point is that “the industry’s starting point is in a deep hole in auto insurance and whatever savings are will only serve to pull them out of that hole during the period,” Baker said.

“How much it will pull them out of the hole is anyone’s guess,” he added. “The problems with auto insurance across the country before COVID-19 will likely greet us again on the other side.”

The benefit to the auto line will accrue to private passenger auto first and foremost, but the absence of traffic congestion will likely drive commercial auto/trucking, gig economy, and delivery traffic loss ratios drastically down as well, Baker wrote in the quarterly report.

To calculate the $500 million auto savings in Q1, the model assumed a 50% reduction in losses for three of the 13 weeks in the first quarter for private passenger auto, and a 35% reduction in commercial losses. Government auto insurers were excluded, “though those insurers will also benefit from the COVID-19 shutdown,” Baker wrote.

“The assumptions of savings of 50% and 35% are somewhat arbitrary guesses and could change dramatically for many reasons,” he noted. “In the U.S. and globally, the industry could experience large auto savings in this anomalous period.”

The six-month model assumes the shutdown will ease by the end of May, and save the industry nearly $1.8 billion in H1 2020. “This saving will greatly benefit auto writers and buffer COVID-19 related losses in other lines of business and investments,” said Baker, adding that commercial writers that don’t write much auto will have no such immunity to the virus.

Related: How Canada’s P&C industry will weather the economic storm from COVID-19

Grant Kelly, vice president of financial analysis & regulatory affairs and chief economist at the Property and Casualty Insurance Compensation Corporation (PACICC), agreed that the negative economic impact from the coronavirus pandemic will be somewhat offset by the reduction in claims that will result from social distancing.

“Social distancing is an extreme measure that should result in fewer auto claims. Why?” he asked in Solvency Matters, PACICC’s quarterly report released Tuesday. “Efforts to contain the new coronavirus include widespread travel bans and quarantine restrictions across the country. Reduced economic and social activity will mean there are fewer cars and thus fewer car crashes on the roads in Canada.”

In Q1 2019, Canadian insurers paid $5.4 billion in auto claims.

As more people self-isolate at home, there are likely to be fewer large personal property claims too, Kelly noted. For example, large water-loss claims often occur when homes are left unattended.

P&C insurers paid $1.9 billion in personal property claims in the first quarter of 2019. Even a small reduction in personal lines claims costs in Q1 2020 (between 1% to 5%) would allow PACICC member insurers to increase their capital base from $200 million to $1 billion, Kelly said.

Jason Contant

Jason has been an award-winning journalist with Canadian Underwriter for more than a decade, including the past three years as associate editor and, before that, as digital editor for seven years.