Capital generation and return metrics in Europe
Despite its ease of calculation, capital generation and return—measured as a change in eligible own funds—may not be the most useful metric.
The short-term and long-term effects of shelter-in-place orders and widespread working from home has had a significant impact on the frequency of auto accidents due to the drop in miles driven. Since the release of a prior Milliman article on this topic,1 we have seen several large insurers respond to this shift in exposure and loss experience in various ways. These companies have announced direct or indirect premium refunds aimed at their policyholders to address COVID-19 and its impact on claim activity. We will discuss several reasons why the market has responded this way and the impact to other parties due to the actions of the insurers.
The actions taken by several large insurers as of the date of this article are discussed below. While this list of companies represents a large portion of the personal auto insurance market in the United States, it is not exhaustive of all insurance company responses.
While the above list covers some of the companies that are providing credits or refunds on active policies, another large auto writer is taking a different approach to reflect the decrease in exposure. GEICO has announced a 15% credit on auto policies that renew between April 8 and October 7. This credit applies to the entire semiannual premium renewed during that time. It will also apply this credit to any new policies incepting in this period. Additionally, the company is expanding a pause on policy cancellation due to nonpayment of premiums through April 30. The pause on policy cancellation has already been mandated by several states for all personal auto writers, in some cases for longer periods.10
As demonstrated by the above list of companies, the personal auto insurance market has taken a unique response to the current crisis and how it has chosen to reflect the impact of the short-term change in driver behavior. While the California Department of Insurance has mandated premium refunds on auto insurance and other lines of business,11 these companies are largely taking these actions voluntarily as a response to the unprecedented environment that we are currently in. There are multiple reasons behind these refunds and credits that make them both good short-term and long-term strategic moves for the companies.
First and foremost, insurers are looking to provide immediate financial relief to their policyholders with these premium reductions and also reassure their customers that, even if a premium payment is missed, coverage will remain active should the need arise. In addition, these insurance companies are positioning themselves to be compassionate partners with their policyholders and, as a result, are seeking to build goodwill with their customer bases during an otherwise difficult and uncertain time.
In the various press releases issued by auto insurers, many of the companies attribute the premium refunds to lower actual claim costs in March and April. They directly cite that the drop in mileage (and therefore exposure) has resulted in a drop in losses and loss-associated expenses. The uncertainty in knowing the duration of current driving behaviors makes extrapolation through the entire year problematic, but CCC Information Services projects a drop of 10.9% in overall miles driven in 2020. In Washington state, during the third week of March, the number of crashes statewide dropped 67% compared to the same week the year before.12 In contrast to the expected drop in loss ratio prior to any premium adjustment, the general expense ratio may actually increase during the pandemic, and investment income could drop. For the expense ratio, the increased cost to shift to a remote working environment and additional inquiries and analyses resulting from the pandemic could result in upward pressure. If the loss ratio drop is greater in magnitude than the other changes, the combined ratios for these months could be much lower than anticipated before any premium adjustment.
First quarter industry results will be released soon, but it is likely that we will have to wait for at least second quarter financials to reveal initial estimates of the extent of the impact of this changed policyholder behavior on current calendar year experience. Are the current refunds announced by the above insurers reflective of the auto industry’s view of how loss experience will emerge relative to a "normal" month? Can insurers quantify the impact on other ratios (expense and investment) as quickly as loss ratios? Currently, the market is estimated to refund $10.5 billion of premium,13 or 4% of the total 2019 direct written premium for personal auto insurance, but will this amount be consistent with the actual improvement in loss experience? Will the premium refund amounts be too large and cause the combined ratios for 2020 to appear high relative to the history, or vice versa? Insurers are reacting quickly to help their policyholders, but it is too soon to determine whether or not the refunds are overly generous.
In contrast to other companies, GEICO’s response directly addresses both a business need to maintain income flow as well as provide relief to policyholders. Because the credit is tied to a policy renewal or a newly issued policy, it guarantees that the insured will remain with GEICO. The discount is on future coverage and not tied directly to the months where the exposure is expected to decrease. By applying the discount to the entire policy period, GEICO also offers a larger relative credit than the other carriers have committed to at this point.
Looking ahead, the decisions by auto insurers to offer short-term premium credits or refunds will likely affect other players in the insurance market in ways that are not yet felt.
For now, most of these refunds are based on a percentage of monthly premiums through May, but insurers have left the window open for them to continue these refunds and discounts as the pandemic situation continues to develop and stay-at-home orders are potentially extended. After an immediate reaction with short-term premium discounts, insurance companies will have to wait to determine whether to apply future premium discounts and react accordingly as this pandemic continues to grow or slows down. Just like the rest of us.
1Anderson, P., Krafcheck, E.P., & Pipkorn, K.A. (March 27, 2020). Nowhere to Drive: The Impact of COVID-19 on the Auto Insurance Industry. Retrieved April 23, 2020, from https://us.milliman.com/en/insight/nowhere-to-drive-the-impact-of-covid-19-on-the-auto-insurance-industry.
2Allstate. Allstate Is Here to Help. Retrieved April 23, 2020, from https://www.allstate.com/covid.aspx?intcid=/home/home.aspx|hero|LearnMore|Covid19200406.
3State Farm (April 9, 2020). State Farm Mutual Returning $2 Billion Dividend to Auto Insurance Customers. Retrieved April 23, 2020, from https://newsroom.statefarm.com/good-neighbor-relief-2-billion-dividend/.
4Liberty Mutual. How We're Responding to the Coronavirus (COVID-19). Retrieved April 23, 2020, from https://libertymutualgroup.com/about-lm/corporate-information/how-were-responding-coronavirus-covid-19.
6Progressive. Apron Relief Program. Retrieved April 23, 2020, from https://www.progressive.com/support/covid19/.
7USAA. USAA to return $520 million to members. Press release. Retrieved April 23, 2020, from https://communities.usaa.com/t5/Press-Releases/USAA-to-Return-520-Million-to-Members/ba-p/228150?_ga=2.21208571.1177498430.1586807018-1772983636.1586807018.
8Farmers Insurance. COVID-19: We're Here to Help. Retrieved April 23, 2020, from https://www.farmers.com/covid-19-notice/.
9American Family Insurance. We're in This Together: Auto Insurance Premium Relief Payment. Retrieved April 23, 2020, from https://www.amfam.com/about/coronavirus/relief-payment.
10GEICO (April 22, 2020). GEICO Is Here to Help During the Coronavirus Outbreak. Retrieved April 23, 2020, from https://www.geico.com/about/coronavirus/.
11California Insurance Commissioner Ricardo Lara (April 13, 2020). Bulletin 2020-3: Premium Refunds, Credits, and Reductions in Response to COVID-19 Pandemic. Retrieved April 23, 2020, from http://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Bulletin_2020-3_re_covid-19_premium_reductions-2.pdf.
12Davis Law Group, P.S. (March 30, 2020). COVID-19 Drives Washington Vehicle Accidents Down 67%. Retrieved April 23, 2020, from https://www.injurytriallawyer.com/blog/covid-19-drives-washington-vehicle-accidents-down-67-.cfm.
13Sams, J. (April 15, 2020). Auto Claims Decline 40 to 50% as Consumers Stay Home, Snapsheet Says. Retrieved April 23, 2020, from https://www.claimsjournal.com/news/national/2020/04/15/296565.htm.
Personal auto insurance: In the time of COVID-19, being a compassionate insurer is a good financial strategy
The personal auto insurance market has taken a unique response to the COVID-19 pandemic and how it has chosen to reflect the impact of the short-term change in driver behavior.