Personal Auto Profits Plummet

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As Losses Top 66 Percent Will Texas Soon Bench the Benchmark System?

Personal auto losses increased last year in 35 of 51 markets across the country, making for an average pure loss ratio of 65.6 percent, the highest level since 1992, when the ratio was at 65.4 percent.

In Texas, the 1999 loss ratio was a percentage point above the national average at 66.6 percent. But 1997 and 1998 had been kind to the Texas market, with loss ratios of 60.9 and 58.7 percent respectively. By comparison, 66.6 percent was a bit much for some companies to swallow.

“While some point to higher claims, it again appears that the old troublemaker, competition, has something to do with it,” auto insurance analyst Brian Sullivan recently reported. “Earned premium fell sharply, from $5.4 billion to $5.0 billion. Take almost 10 percent off the top line, and what do you get? Almost a 10 point rise in the loss ratio. The math is pretty compelling.”

“Though we discount the most dire predictions for 2000, it is a dead certainty that it will be much worse than 1999 and could even push some companies into red ink overall,” Sullivan said in his July 10 Auto Insurance Report. Perhaps hardest hit in Texas has been the non-standard market, which has seen the exodus of numerous companies. Those that have stayed have bolstered themselves by increasing rates.

One path, two directions One such example is Allstate. Comparing the company’s standard and non-standard markets is like comparing night and day. Allstate’s standard market has increased premiums for 2000 by double digits through the first half of the year, according to Travis Carter a company spokesman. At the same time, the company’s standard market share has risen almost a full percentage point—not the makings of hard times even if loss ratios have gone up.

“We’re seeing a lot of growth in our standard book of business,” Carter said.

But Allstate County Mutual has not fared so well during the first half of 2000. And Allstate’s Deerbrook Insurance Co. pulled out of the Texas market in early June.

Premiums are down 2 percent to date at Allstate County Mutual compared to the same time period last year. It would be considerably worse, Carter said, had the county mutual not increased rates by an average of 8.4 percent so far this year.

The result of increasing rates is a lot more consumer shopping for coverage. While companies may not like the situation, independent agents say that’s good news.

“I think we’ll all be better for the [hard market],” said Jack Ellis, president and owner of Auto Advantage Insurance Agency in Houston. “It’s just Mother Nature at work. It’s survival of the fittest.”

In early June, four small Texas auto insurers pulled out of the market, apparently determining they were not quite fit enough for the pending fight for survival. Integon, Texas All Risk General Agency, Bankers Insurance Group and Allstate’s Deerbrook all pulled out.

There are numerous factors hardening the market, including rate inadequacy, decreased investment opportunity, increased losses, the Texas Department of Insurance order for the use of OEM parts and, as many standard companies point out, antiquated benchmark rate setting.

“I don’t think you can put your finger on one specific issue,” Mark Solomon, president of the Auto Insurance Agents of Texas, said in mid-June.

Dereg to come? But one issue lawmakers will most likely put their finger on during the 2001 legislative session is deregulation.

“I am hearing that there’s going to be a bill introduced that will provide for more rate flexibility,” said Bo Gilbert, a legislative liaison for the Independent Insurance Agents of Texas.

He said the Department of Insurance is in the process of reviewing rate-setting methods, but the department is remaining tight-lipped about what it will propose to the legislature this December.

Meanwhile, John Marlow, the director of public affairs for the southwest region for American Insurers Association, said deregulation in Texas is going to be a priority issue, though county mutual companies, which enjoy an advantage over rate-regulated companies, will likely fight such a proposal tooth and nail.

“Obviously, in the last session, the county mutuals played a significant role in defeating the bill by putting all their political weight behind keeping the issue out of the legislative agenda,” Marlow said. “But they’re only 24 companies compared to 700 rate-regulated companies.

“What we’re saying is we need to level the playing field, bring some balance back into the playing field, rather than being restrained by the archaic benchmark system.”

Marlow would like to see a file-and-use type of system being available to all auto insurers in Texas. But what happens to county mutuals should such a system be put into place?

County mutual representatives say if deregulation were to occur, the amount of written premium for the newly-nimble stock, Lloyds and reciprocals could increase significantly, yanking as much as one-third of the county mutuals’ business, though none are willing to put their name behind that statement.

But if Bo Gilbert’s crystal ball is working properly, deregulation, despite its support from standard companies and its perceived support by the Department of Insurance, will probably not get too far. Like many other issues, it will all boil down to politics.

“It’s probably going to go a little further than it did last session, but I don’t know that we’ll see anything done on it,” Gilbert said. “There are two factors that will play against it: this is a redistricting year and the county mutuals are against it.”


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