Viewpoint: California’s Personal Auto Market: Steering Through Change

The withdrawal of major homeowners insurance companies in the California market made national headlines, but news just as concerning and impactful is California’s private passenger auto insurance market.

Much like the homeowners market, the PPA market has seen significant changes in recent years, contributing to a complex and shifting landscape that has insurers spinning their wheels.

One of the most notable changes was when the California Department of Insurance put a moratorium on PPA rate increases at the start of the pandemic. After Gov. Gavin Newsom’s shelter-in-place order on March 4, 2020, the number of miles driven dropped significantly, along with other notable measures of risk.

As insurers writing PPA and other impacted lines of business faced reduced exposure to loss, California Insurance Commissioner Ricardo Lara released bulletins 2020-3, 2020-4,2020-8 and 2021-03 (“Premium Refunds, Credits, and Reductions in Response to COVID-19 Pandemic”) requiring insurers to make appropriate adjustments and refund a portion of customer premiums.

Anticipating fewer accidents amid the lockdown, insurers readily agreed to give back roughly $14 billion nationally to policyholders in the form of cash refunds and account credits. Even after the remaining COVID-19 restrictions in California were lifted in June 2021, the moratorium remained in place until October 2022, when the first insurance rate increase approval was granted to Allstate.

Rate Pressures Impacting Auto Insurers

During the moratorium period, inflation throughout the U.S. and global economies — driven in part by pandemic-fueled supply chain issues — resulted in a rapid increase in PPA severity, particularly around material damage coverages.

Early in the pandemic, injury severities rose drastically due to the drop in accidents that typically occur at lower speeds in congested traffic. While this severity was expected to return to pre-pandemic levels along with miles driven, industry data show that injury severity has remained high.

Despite frequency returning to a “new normal” at slightly lower levels than before the pandemic, severity increases in the PPA market have surpassed the gains from depressed frequency, with companies experiencing more significant losses in PPA than they had in the decade prior. Costs associated with auto accidents – such as auto parts and hospital bills – also rose. This led to heightened pressure on companies to increase rates.

Increased Insurer Scrutiny

Consumer advocacy groups have also become increasingly active during this time, intervening on multiple PPA rate filings while asserting that companies still owe additional refunds per the insurance commissioner bulletins. Consumer Watchdog attorney Daniel L. Steinberg has argued that certain insurance companies have created a job- and education-based discriminatory rating system that will allow “professional” groups to “benefit on the back of low-income and blue-collar Californians.” All this has led to increased scrutiny of PPA rate filings and has further complicated the market.

At the same time, many companies posted record-high combined ratios – the measure of underwriting profitability – throughout 2022, even as rate increases were still not being approved.

A combined ratio under 100 indicates a profit, and one above 100 indicates a loss. The private auto business was besieged by the impact of inflation on vehicle repair and replacement costs, which veered to a combined ratio of nearly

101.5% in 2021 from 92.5% in 2020 and 98.8% in 2019, S&P reports. For the second quarter 2022, the combined ratio was even worse with a combined ratio of over 105, meaning that for every dollar insurers took in, they lost $1.05.

This led to increased pressure on regulators to allow for rate increases, despite consumer advocacy groups pushing back. Companies responded to the hardening market by tightening underwriting standards around new business, which led to more guidance from the California insurance commissioner. Bulletin 2022-10, “Changes to Premium Payment Options Without the Prior Approval of the Department of Insurance,” generally provides that any discontinuing of premium payment plans would need to be approved by the CDI prior to implementation, as these changes would likely result in a rate impact.

Rapid influx of rate increase filings

Other rate increase approvals continued after the one for Allstate, including for GEICO, Mercury and Interinsurance Exchange of the Automobile Club, despite consumer advocates intervening on their filings. However, a significant number of requests are still pending in the PPA market. Many companies are seeking rates in excess of 6.9%, which could trigger a public hearing in the case of an intervenor — historically a threshold that most would stay below to avoid the potential of a lengthy hearing. The caveat for the hearing is that if you can reach an agreement with an intervenor, they, (not the CDI) can decide not to proceed with the hearing if all parties can come to agreement.

Leading the way with these large requests is Root Insurance Company, with a 62.4% rate increase that is still below the minimum range allowed in its California Prior Approval Rate Template. To request a rate lower than the allowable range, Root Insurance needed to request Variance 5 (per CCR section 2644.27).

There are more than 55 CDI File numbers since the end of 2021 with rate request increases greater than 20%, another 25 plus requesting increases greater than 10%. Of the top 30 companies by market share in California, 16 have requested rate increase of more than 20%, accounting for roughly 61% of the California market share and roughly $20 billion of written premium in 2022.

Another issue these companies are facing is how to adjust pandemic era data to achieve a reasonable indication and still fit within the CDI’s rigid templates. From the Web Access to Rate and Form Filings, carriers are roughly split between those requesting variances to adjust their data (per CDI guidelines posted June 3, 2021) and those leaving the data as is and trying to select reasonable trends within the constraints of the CDI rate templates.

For PPA rate filings with public notice date of January 1, 2022, through September 29, 2023, WARFF has a count of 156 CDI File numbers, 79 of which filed with no variance and 77 with a variance. Of those that are Closed-Approved, the average approval time is 202 days for those without a variance, and 180 days for this with a variance. This is a 12% longer approval time for those filings that did not submit a variance.

Additionally, the average approval time for PPA overall is roughly 191 days, as of September 29, 2023. Anchor General Insurance Company had the shortest approval time – at a “swift” 59 days on a 19.4% rate request with variance and had 19.2% approved. But the influx of rate filings since Allstate’s approval has created a significant backlog, and it is unclear how quickly the CDI will be able to process rate filings.

This is somewhat exacerbated by many companies planning to file for multiple rate increases one after the other in order to avoid triggering a public hearing for a rate increase in excess of 7%. However, it seems that many larger companies such as Allstate, State Farm, GEICO, Farmers, Mercury and Infinity have reversed course in this strategy, and after getting 6.9% approved, have filed for full rate need with each company submitting a rate request greater than 20%. Recent changes by the CDI to improve rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional CDI staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process may help expedite these approval times further.

Drivers of Change

With the market changing so rapidly, what will happen next? Auto companies in the California market, beleaguered by the pandemic, inflation, continuing supply-chain issues, years of no rate increases, pressure by consumer advocacy groups and an influx of pending rate requests, are pulling back.

For example, on August 17, Kemper Corporation announced its exit from the auto insurance market, though they continue to offer nonstandard auto insurance through some of its other brands. Topa Insurance Company said the company will no longer write auto insurance in California. And Wawanesa Mutual? It announced on Aug. 1 it is selling the struggling U.S. portion of its business, which operates mainly in California, to the Automobile Club of Southern California, a AAA insurance provider.

Not surprising given the surplus erosion (more than half since 2022Q3) it experienced during 2022 – amassing net underwriting losses totaling $206.9 million during a six-quarter stretch through Dec. 31, 2022, according to data compiled by S&P Global Market Intelligence, with combined ratios ranging from a low of 117.5% in the fourth quarter of 2022 to a high of 150.3% in the third quarter of 2022.

Staying competitive in the California PPA market

While there are signs of inflation cooling off following 40-year highs, it is not at the levels that the Fed wants. There is no doubt that pricing actuaries and other insurance industry professionals will need to stay on top of these developments to successfully navigate the market and help their companies to remain competitive.

The personal lines insurance market is experiencing a persistently hard market that may extend for several more years. Carriers have found it difficult to outpace inflationary cost trends in a highly regulated marketplace. They have made it clear that the 2023 focus is disciplined underwriting and an emphasis on profitability over growth, particularly with restrictions experienced in California.

Whatever strategies carriers decide to take, it is important to ensure all the CDI templates are filled out completely and clearly identify the corresponding variance to which it applies to support a smooth transition from intake to public notice. With new rate increases being filed regularly, insurers won’t want to get pushed to the back of the line due to minor errors in the templates; they’ll want to keep moving forward.

Yost is senior consultant, insurance consulting and technology with WTW.

Topics California Auto Personal Auto