California's Auto Insurance Exodus

Auto insurance companies are leaving California due to a combination of rising coverage costs and other market factors. From 2020 to 2021, auto insurance losses spiked 25% while premiums increased by only 4.5%. This has made it challenging for companies to continue insuring drivers in the state. In addition, the rate and severity of auto accidents have increased, along with the costs to cover them. The cost of renting a car and purchasing a new vehicle has also gone up, further impacting the profitability of insurance companies. Some insurers in California have not received approval for rate increases in over three years, making it difficult for them to sustain their business. As a result, companies such as Geico, Progressive, and Farmers have started to leave the California auto insurance market, causing concerns about the impact on drivers and the potential for this to become a wider trend.

Auto insurance losses spiked 25% from 2020 to 2021

California's auto insurance market is in a state of flux, with major insurers pulling back or leaving the state, citing rising coverage costs and other market factors. One of the key issues is the spike in auto insurance losses, which increased by 25% from 2020 to 2021, while premiums only rose by 4.5%. This has made it challenging for insurers to remain profitable in the state.

The increase in auto insurance losses can be attributed to several factors. Firstly, the rate and severity of auto accidents have risen. According to the National Safety Council (NSC), motor vehicle deaths increased by 11% in 2021, following an 8.3% increase in 2020. This means that insurers are dealing with a higher number of claims, and the average payout per claim has also increased.

Additionally, the cost of auto repairs has gone up significantly. The consumer price index (CPI) for auto repairs and maintenance increased by 33.2% between January 2019 and July 2023, according to the U.S. Bureau of Labor Statistics (BLS). As a result, even if the rate and severity of accidents had remained the same, the cost of claims would still have risen.

The high price of used cars has also contributed to the spike in insurance losses. Used car prices have climbed dramatically, and insurers often pay the current market value for total loss claims. This has led to much higher payouts for totalled vehicles, even in cases where the premiums were based on lower vehicle values at the start of the policy.

Furthermore, California has experienced catastrophic climate events, such as wildfires, which have increased the number and severity of claims. While these events have primarily affected the home insurance market, they still impact the bottom line of insurers offering multiple types of coverage.

Insurers in California also face regulatory challenges. They must obtain permission from the state's insurance commission to increase rates, and some companies have gone years without receiving approval for rate hikes, despite the rising financial risks. This has made it difficult for insurers to adjust their rates to keep up with inflation and the increasing cost of claims.

The combination of rising losses, stagnant or insufficient premium increases, and regulatory constraints has made the California auto insurance market less attractive to major insurers. This has resulted in a reduction in their offerings or a complete withdrawal from the state, leaving consumers with fewer options and potentially higher costs.

Premiums increased by only 4.5% in the same period

Auto insurance companies are pulling out of California because they claim that California drivers are too expensive to insure. Between 2020 and 2021, auto insurance losses spiked by 25% while premiums increased by only 4.5%. This means that insurers were paying out more in claims than they were taking in from premiums.

The American Property Casualty Insurance Association (APCIA) has stated that the rate and severity of auto accidents are up, as are the costs to cover them. The cost of renting a car is up by 33% and the cost of a new vehicle is up by 11%. This has resulted in insurers paying out more in claims than they are taking in from premiums, which is not a sustainable business model.

In California, some insurers have not had a rate increase approved by the insurance commissioner in over three years. This is because California is a very consumer-friendly state, and insurers must have any rate hikes approved. The insurance commissioner, Ricardo Lara, has argued that the commissioner saved Californians $2.4 billion in reduced premiums during the height of the COVID stay-at-home order, when the industry still raked in a collective $42 billion in excess premiums.

However, insurance companies and organizations like the APCIA argue that it is simple mathematics. The difference in these increases has made it financially difficult for companies to continue to insure drivers. Robert Passmore, APCIA Department Vice President of Personal Lines, stated that:

> "Nationally, rapid increases in overall economic inflation continue to drive up auto insurance losses. Insurance claims inflation has continued to rise faster than the underlying consumer price index, far outpacing increases in premiums."

Another factor contributing to the rise in insurance claims costs is the increase in the rate and severity of auto accidents. According to the National Safety Council (NSC), 2021 marked the second year in a row that motor vehicle deaths increased. The U.S. saw an 11% increase in traffic fatalities in 2021 after an 8.3% increase in 2020. This means that auto insurers are paying out more claims by number than in previous years, and the average payout for individual claims has also increased.

Auto accidents are more frequent and severe

Auto accidents in California are becoming more frequent and severe. California, the most populous state in the US, is known for its congested roads and highways, which have led to car accidents becoming commonplace. The consequences of these accidents can be devastating, resulting in property damage, serious injuries, and fatalities.

The California Highway Patrol's Statewide Integrated Traffic Records System (SWITRS) 2019 Report showed 269,031 injuries and 3,737 deaths related to car accidents that year. The 2022 estimates put the number of injuries at 221,559 and fatalities at 4,030. These figures highlight the urgent need for measures to improve road safety in California.

The high frequency of auto accidents in California can be attributed to various factors. The state's large population and high number of registered vehicles contribute to the problem. Additionally, limited government funding for road maintenance can result in unsafe road conditions, such as potholes and debris, which can cause accidents. Poor road conditions can also contribute to driver distractions.

The climate and tourist attractions in California may also play a role in the high number of accidents. The pleasant weather and numerous attractions may encourage riskier behaviours on the road, such as higher rates of alcohol consumption or reckless driving.

Distracted driving, drunk driving, speeding, and breaking traffic laws are among the leading causes of car accidents in California. Distracted driving has become increasingly common with the rise of smartphones and other devices. From 2017 to 2022, alcohol-impaired driving accounted for 22% to 26% of the state's traffic fatalities. Speeding was a factor in about one-third of fatal and injury car accidents during the same period.

The severity of auto accidents in California has also increased. The National Safety Council (NSC) reported that 2021 marked the second consecutive year of rising motor vehicle deaths in the US, with an 11% increase in traffic fatalities. The average payout for individual claims has also increased due to the rising cost of vehicle repairs and the high price of used cars.

The combination of frequent and severe auto accidents has resulted in insurance companies paying out more in claims than they are taking in through premiums. This has led to concerns about the sustainability of the auto insurance market in California and the potential impact on drivers if more insurance companies decide to leave the state.

Auto repairs and maintenance are more expensive

Auto repairs and maintenance are becoming more expensive, and this is a significant factor in the rising costs of insurance claims. Data from the US Bureau of Labor Statistics (BLS) shows that the consumer price index (CPI) of auto repairs and maintenance increased by 33.2% between January 2019 and July 2023. This is a notable rise, and it means that payouts for individual repair claims have increased substantially.

There are several reasons for this increase in auto repair costs. Firstly, vehicles are becoming heavier and more powerful, and this means that crashes are becoming more severe. Vehicles were 33% heavier in 2022 than in 1985, and they now have twice the horsepower. This means that when collisions do occur, the damage is often greater, and the cost of repairs is higher.

Secondly, cars are becoming more complex, with more parts that can break. They are increasingly stuffed with technology, such as turbochargers and all-wheel-drive systems, which add to the equipment that can malfunction and need repair. The computerization of cars has also added to the complexity, with more sensors that can be damaged in accidents. These sensors are often costly to replace.

Another factor is the increasing use of lightweight materials such as aluminum, which can be brittle and require more frequent replacement. While new manufacturing methods have reduced the overall number of parts in cars, the remaining parts tend to be larger and more expensive to replace.

The talent pool for repairing cars has also diminished. The Covid-19 pandemic exacerbated an existing shortage of technicians, and as a result, labor rates for repairs have increased. In 2019, the average labor rate for repairs was under $50 an hour in the US, but by the end of 2023, it had risen to close to $60.

The pandemic also disrupted shipping and contributed to an increase in the cost of car parts. In 2022, the cost of parts sourced from automakers rose by 10%, and aftermarket parts rose by 17%, far outpacing the usual annual inflation rate of 0% to 4%.

The combination of these factors has led to a significant increase in the cost of auto repairs and maintenance, which, in turn, has contributed to the financial strain on insurance companies operating in California.

California's insurance commissioner disputes that there is an availability crisis

California's insurance commissioner, Ricardo Lara, disputes the idea that there is an availability crisis in the state's auto insurance market. He attributes the problems in the market to global inflation and supply chain issues, which have made it more difficult to obtain car parts. He also points out that the department of insurance is focused on protecting drivers and helping them get the most value from their premium payments.

Lara emphasizes that there is still a very thriving market for auto insurance in California, despite the challenges. However, he acknowledges that adjustments need to be made to adapt to the changing economic landscape. He believes that the issues in the market are not due to a rate moratorium, as some have suggested, but rather the result of external factors such as inflation and supply chain disruptions.

The commissioner's office has a different perspective on the situation, placing the blame on insurance companies' focus on increasing rates rather than protecting drivers. They point out that the commissioner saved Californians $2.4 billion in reduced premiums during the COVID stay-at-home orders, even as the industry collected $42 billion in excess premiums. Additionally, insurance companies cannot refuse to cover Californians, as it is a "take-all market."

While there may be challenges in the auto insurance market, the commissioner's dispute of an availability crisis highlights the complex dynamics between insurance companies, regulators, and consumers. The commissioner's role is to balance the needs of insurance companies with the protection of consumers, ensuring that rates remain fair and that coverage remains available, even in high-risk areas.

The dispute also brings to light the impact of external factors, such as inflation and supply chain issues, on the auto insurance industry. As costs associated with auto accidents, such as car parts and hospital bills, continue to rise, insurance companies may need to adjust their rates accordingly. However, the commissioner's approval is required for any rate increases, and the process may not always be smooth or immediate.

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