The path ahead for the auto insurance market

Roller-coaster auto trends post-COVID and the path ahead

The last few years have been defined by uncertainty and volatility across the auto insurance market. Within the property and casualty space, personal auto lines were among the most impacted. As of Q3 2023, the auto industry post-COVID is still struggling to catch up to the rapidly growing need for rate. The resulting whiplash has left many insurers second-guessing themselves and racing to take rate. On top of that, 2024 auto insurance market outlooks are turning increasingly pessimistic, which is a sign that tumultuous market conditions are likely to continue.

Challenges facing the auto insurance market

In early 2020, the COVID-19 pandemic caused a sudden and significant decrease in the amount of time and miles that drivers were spending on the road. This reduction was so dramatic that nearly every personal auto insurer in the market issued premium refunds to their policyholders. In total, these refunds amounted to more than $13 billion across the industry. As of 2023, drivers have gradually been picking up speed, and driving habits within the auto industry post-COVID are now in line with pre-pandemic norms.

The severity crisis

In the wake of the worldwide pandemic, a swelling money supply combined with supply chain struggles paved the way for inflation to surge at levels previously unseen since the early 1980s. Over four years, from October 2019 to October 2023, the auto insurance market saw the cost of motor vehicle maintenance and repair grow 31%. Down the line, property damage and collision severity trend estimates reached as high as 20% in 2022.

It's important to note that inflation isn’t the only reason for rising costs. The increasing technical complexities of motor vehicles has led to carmakers requiring stricter adherence to original manufacturer guidelines for replacement parts and repairs. Plus, new mandates for vehicle systems require that they be scanned for faults after ever repair. Tighter restrictions and specifications have limited the use of cost-efficient aftermarket parts for repairs, forcing insurers to pay the premiums for original equipment manufacturer’s replacement parts, further driving up severities.

Additionally, since the start of the pandemic, the cost of used vehicles has jumped at an even greater rate than that of auto body work. While we can attribute a portion of this rise to inflation, there is also an increase in litigation rates that plays a major role. Industrywide liability claim closure rates reveals a slowdown in claim closures for 2022, which suggests that more attorneys and legal teams are holding claims open for longer, driving severities even higher. 

Florida’s House Bill 837, a tort reform act aiming to temper growing damage awards and increasing auto insurance market costs, came into play as of July 2023. The law has driven notable change, including repealing one-way attorney fees, adjusting the “bad faith” framework to benefit insurers, reducing the statutes of limitations for cases involving general negligence, and providing a framework for juries to utilize when awarding medical damages. While it’s still too early to determine the full extent of the bill’s impacts, it’s possible that it may lead to heightened litigious activity in neighboring states as claimants aim for more favorable verdicts elsewhere.

The road ahead

Unfortunately, any optimism for a quick return to profitability in 2023 was dashed as the year came to an end. Even though broader economic inflation appears to be letting up, severity trends have so far remained rooted in place. Frequencies have stabilized, but there is plenty of uncertainty around what direction litigation rates will take going forward.

Despite ongoing challenges facing the auto industry post-COVID, rare opportunities are emerging across the sector. The fierce rate disruption that is being felt by policyholders—combined with an economy turning more recessionary—is likely to drive an equally fierce reaction in how consumers shop for policies. Carriers who are able to maintain a degree of agility and skillfully navigate these difficult circumstances may find themselves well positioned in the market for years to come. Dive deeper into the data in this new report to learn more about how the insurance industry is tackling emerging issues, what you can expect moving forward, and how Deloitte can help.