Are Mandated Auto Premium Reductions Justified?

Policymakers in many states - notably including California, Michigan and Louisiana in recent weeks - are considering aggressive steps to drive down auto insurance premiums in the wake of the Covid-19 pandemic and changes in driving behavior.  Even as they contemplate this, many leading carriers have already taken temporary action to reduce rates during the pandemic – both because it was the right thing to do and to forestall damaging policy changes.

On the surface, those initial reductions make some sense.  According to the US Energy Information Administration, gas sales were down 20% in March 2020 over March 2019 – and we all saw the roads were pretty empty.  Gas sales were very likely even lower in April during the height of the shutdown.  With reduced gas sales and empty roads came fewer claims.  And lower claims should drive down premiums in normal circumstances.

But will this still be true as the economy is re-opened in the weeks and months ahead?  Maybe not.

Early data from refineries and distributors suggest gas sales are quickly returning to ‘normal’.  Instead of continued relief from traffic, some experts predict that gridlock is coming to our cities as people choose to return to work by car instead of mass transit.  One forecaster suggests a 30% increase in commute traffic is coming this fall – and that our highways will soon be congested even more than before the virus hit (https://abc7news.com/bay-area-commute-covid-19-coronavirus-traffic/6248486/).  But other forecasters suggest that 25-30% of office employees will continue to work from home at least several days a week – and thereby skip the commute altogether (https://globalworkplaceanalytics.com/work-at-home-after-covid-19-our-forecast).  

At the same time, leading travel analysts observe that 30% of travelers have already switched from flying to driving for work and vacation.  And of course, there is the fear that a second wave could trigger renewed shutdowns.

So, what should we make of this?  How will the shift from bus to car and commute to vacation travel play out in terms of insurance economics?  Will these changes be transitory or permanent? Should policymakers act now – or wait for this settle out before making any dramatic moves?

At VeracityID, we think:

• The pressure to offer mileage-based insurance will increase – at least until there is clarity about driving patterns in the post-Covid economy.  But this may accelerate an adverse selection problem – with low mileage drivers switching from conventional to mileage-based coverage, and high mileage drivers sticking to conventional coverage with unreasonably low estimated miles.  Carriers need to monitor vehicle use in both cases – or will get burned.
• Policymakers should tread lightly for a few more months, at least.  If mileage increases significantly, a forced premium reduction could induce market failures.  If mileage falls, competition will soon drive down rates or risk intervention.  But if traffic gridlock happens, we will likely see a drop in claims severity in the near-term and an acceleration toward alternative work and commute patterns in the mid-term.  But none of this is clear today.
• Carriers should use this period to look for ways to increase customer retention by focusing on improving the customer experience across channels and striving to reduce rates by eliminating fraud, manual work and transaction costs.

Eliminating Underwriting Fraud Can Save Consumers and Carriers Up to 20% of NPW.  

Website: veracityid.com   Twitter: @VeracityID