Rise in Fatal Auto Accidents Could Lead to Higher Premiums
By Craig Guillot
Motor vehicle fatalities on U.S. highways reached an 8-year high in 2015, and insurance experts say it could lead to higher auto insurance premiums in the coming years.
The National Safety Council recently released preliminary estimates indicating motor vehicle deaths rose by 8% in 2015. The council projects there were 38,300 deaths and 4.4 million serious injuries on U.S. roads last year. It represents the highest death toll on record since 2008 and the largest year-over-year percentage increase in fifty years.
Insurance industry experts say that as the number and severity of accidents rise, higher auto insurance premiums can also follow. Joan Schmit, Distinguished Chair of Risk Management and Insurance at the University of Wisconsin-Madison, says a rise in accidents will “absolutely affect premiums.” Schmit says insurers often raise premiums to cover loses or if they anticipate more claims in the near future. “Losses are a big component of what goes into premiums, and any time they rise insurers will likely raise premiums as well. More accidents means more losses,” says Schmit.
Serious accidents can result in significant claims for insurers. According to data from the Insurance Information Institute, the average auto liability claim in 2014 was $3,290 for property damage and $16,640 for bodily injury. Claims for fatal accidents can rise well into the tens of thousands of dollars, even hundreds of thousands, depending on the coverage of the at-fault party.
One major national insurer noted in federal filings in the past year that it has already seen a decline in underwriting profits and was “implementing rate increases as needed.” The insurer reported that its profits tumbled by 40% between 2014 and 2015.
Investor Warren Buffet also said on CNBC in late-February that insurance premiums would rise because of the increase in accidents last year.
“Rates will have moved up and you will see it as you get renewals…both because the frequency of accidents has gone up and the cost of accidents has gone up,” said Buffet in the interview.
Another major carrier had already raised premiums in the second quarter of 2015 due to a nearly 50% decline in auto insurance profits. At the time, the CEO attributed it to a rise in accidents.
Dave Cather, clinical professor of risk management at Penn State University in University Park, Penn., says the potential for premium increases “will largely depend on the insurer.” Cather says insurers have “varying levels of sophistication” in how they use data to forecast risk and losses. He also says insurance companies are secretive with their calculations and don’t publicly announce numerical correlations of how those risks impact premiums. While it’s hard to say how quickly and by how much, Cather says if accidents and fatalities are on the rise, higher premiums “will likely follow.”
Cather attributes the rise in injuries and fatalities to more miles being driven, something he says is likely fueled by lower gas prices and an improving economy. The U.S. Department of Transportation recently reported that 2015 was the most heavily-traveled year in history with drivers traveling more than 3 trillion miles, a 3.5% increase over 2014.
“People are simply driving more miles and the more miles driven, the more accidents there will be. Insurers may expect more losses,” says Cather.
Schmit says insurers will also consider loss data and weigh premium increases on a state level. While motor vehicle deaths were 8% higher for the year nationwide, those rates varied dramatically by state. The NSC estimates that the states that saw the biggest increases in fatal accidents were Oregon (27%), Georgia (22%), and Florida (18%). Yet, thirteen states also saw a reduction in fatal accidents, the greatest decreases happening in New Mexico (-20%), Kansas (-7%), and New Jersey (-2%).
“Location really matters as rates tend to be state-based and more location-specific. There can even be big differences in different parts of a state,” says Schmit.
Schmit says it can take “up to a couple of years” for drivers to see higher premiums. That delay is because drivers typically renew a policy every six months and because insurers must also have rate increases approved by state regulators. It means drivers in such states as Oregon, Georgia and Florida could see higher premiums on their next auto insurance renewal.
“It can take a while. Some drivers [may already be seeing premium increases]. There’s a regulatory aspect associated with it and it really depends on how quickly regulators allow insurers to increase their prices,” says Schmit.