Auto accidents and claims costs are on the rise and insurer profits are feeling the pressure, according to a recent Wall Street Journal article titled, “Smartphone Use Lifts Car Insurance Rates.” Insurance defense law firms that serve as auto panel counsel for personal lines carriers will want to monitor these trends closely.
Lower gas prices and a national economic recovery mean more cars are on the road, resulting in more accidents. Add to this an increase in distracted driving and insurers are watching as profitability takes a hit.
While cellphone use has been widespread for years, more people now than ever admit to texting and web-surfing while driving. In their 2015 survey, State Farm found that 36 percent of drivers surveyed admitted to texting while driving and 29 percent said they access the internet. In 2009, these numbers were 31 percent and 13 percent, respectively.
There is a striking correlation between the rise in smartphone use and crashes, according to Allstate. Vehicle-related deaths rose 8 percent in the first nine months of 2016 from the same period in 2015, according to National Highway Traffic Safety Administration estimates.
Costs associated with crashes are outpacing premium increases for many companies. Industrywide, insurance companies are currently paying $1.05 in costs for every $1.00 in premium revenue compared to $0.95 for every $1.00 over a decade ago, according to a recent Bloomberg Businessweek article titled “Insurance Bills Rise as Texters Crash Cars.”
Rising healthcare costs and car repair bills are the main culprits of increased claim costs. Car features like driver-assistance technology and bumper cameras are meant to minimize accidents, but they also increase the cost of repairs. A bumper may have cost $1,500 to fix 10 to 15 years ago. Today, a bumper with all the new technology could very easily cost $3,500 to fix, according Bloomberg Businessweek.
State Farm, the largest U.S. property and casualty insurer, revealed that 2016 annual profits fell 94 percent, from $7 billion to $4.4 billion, on car insurance claim costs and underwriting losses.
As a result, auto insurance rates continue to climb. Horace Mann Educators Corporation, an auto, property and life insurance company for teachers and educators, expects to raise rates 8 percent this year on top of an average 6.5 percent increase in 2016.
Consumers are reacting to higher premium rates by shopping around and even changing insurers. This is becoming easier to do with startups and venture capital investors entering the online insurance-shopping business. Companies like Zebra, CoverHound, and Compare.com are helping consumers find cheaper auto insurance options.
While large carriers have implemented usage-based pricing to incentivize safe driving and offer discounts, startup insurers like Metromile provide lower rates by allowing drivers to pay for coverage by the mile. Metromile typically charges a flat fee of $35 per month and then $0.05 per mile.
Over the longer term, additional disruptors are likely to affect big auto insurers. The $200 billion global business could shrink 80 percent by 2040 according to a report from Morgan Stanley and Boston Consulting Group.
Insurers’ profitability may continue to be affected by distracted driving and smartphone use. Other potential threats to large insurance companies include ridesharing services like Uber, self-driving vehicles, and competitor use of driver data collected from connected cars .
Implications for Insurance Defense Law Firms
Law firms that defend claims for personal lines auto carriers are likely to see a steady increase in files. As carriers come under profit pressure, so too will the auto panel counsel law firms that defend them, however.
Auto claims are already among the lowest paid (billable-hour wise), and law firms handling auto claims will see continuing emphasis on low rates and probably flat rates. The law firms that are able to standardize or streamline the claims process will clearly come out ahead.
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