Are Auto Insurance Rate Adjustments Driving Away Your Best Customers?
Policyholders are being squeezed from all sides by personal insurance price increases. According to S&P Global, U.S. private auto insurance rates increased by 30.9% between 2018 and 2023. In addition, S&P Global says homeowners insurance rates rose by an average of 33.8% over the past five years. In 2023 alone, homeowners insurance rates jumped by 11.3%.
Insurance is a necessity, but this doesn’t mean policyholders will simply tolerate rate hikes. Faced with rising prices, many people are shopping and some are even canceling their policies.
The J.D. Power 2023 U.S. Insurance Shopping Study found that large numbers of auto insurance customers are switching carriers and that the switch is largely motivated by price. In May 2023, the average shopping rate climbed to 13.1%.
In an alarming trend, some drivers are flouting state law and forgoing auto insurance entirely. J.D. Power found that the number of American households with at least one vehicle who lack auto insurance increased from 5.3% in the second half of 2022 to 5.7% in the first half of 2023.
Meanwhile, according to a September 2023 report by Fitch Ratings, the industry’s personal auto loss ratio remains elevated at 77%, despite substantial pricing and underwriting actions taken over the past two years.
The Slippery Slope of Rate Increases by Segment
Insurers have a real challenge on their hands. Inflation, rising claims severity, and an increase in natural catastrophe losses have all been chipping away at profitability. Unfortunately, rate hikes appear to be pushing customers away, rather than improving underwriting profitability.
How high can prices go before insurance companies lose all their best customers?
Here’s a snapshot of the auto insurance industry’s slippery slope:
An insurer raises its rates across a broad segment.
The rate increase causes many policyholders to shop for cheaper coverage.
Since the best insurance customers are able to find better rates elsewhere, they switch.
As policyholders with higher risk levels can’t find better insurance rates, they stay.
The insurer is left with a smaller segment, populated by a higher percentage of high-risk insurance customers.
The segment’s loss ratio goes up instead of down, forcing insurers to raise rates again.
How Policy-Level Risk Selection Can Change the Game
If broad rate increases and underwriting rule changes aren’t the solution, what IS the solution?
Insurers don’t have to throw the baby out with the bath water. With policy-level underwriting, they can improve loss ratios without filing new rates or eliminating entire segments of business, losing substantial premium volume in the process.
Auto insurers need to control losses where they’re happening. Instead of raising rates for all customers within a segment – and losing their low-risk customers in the process – auto insurers can leverage sophisticated SaaS, powered by machine learning to make informed underwriting decisions on a policy-by-policy basis.
Imagine what auto insurers could achieve if they could accurately score each policy’s likelihood of a claim, in less than one second, at the rate call of their choice, or at multiple rate calls. Finally, they could make data-driven underwriting decisions at a policy level – effectively controlling losses without penalizing low-risk customers.
A New Reality
With Soteris, auto insurers and MGAs of all sizes can have this underwriting technology up and running in roughly four months, without ripping and replacing systems or filing new rates. The Soteris machine-learning solution generates ratemaking data and risk scores based on your own book’s loss experience, equipping you with a proven solution for taking control of auto insurance loss ratios.
