Personal Finance

Rate Hikes Are Coming: Auto Insurance Policy Holders Beware

You know those expensive car insurance bills you pay every month? Well, they may be getting a bit more expensive. The past year has been a precarious one for the auto insurance industry. According to SNL Financial, while the largest insurers wrote more premiums in 2015 than they did in 2014, they also paid out unprecedented sums in claims. The result was 14 out of the 20 largest auto insurers actually ran losses last year on their auto insurance premium profits. Lost profits plus a stagnant and uncertain bond market have auto insurance companies in a pinch, and when companies begin to feel the pinch, customers should expect to feel it as well.

The crunch began in early 2015 when a combination of low unemployment and oil prices led to more drivers being on the road than ever. As a result, there were more accidents , meaning the companies were forced to cover the expensive costs. Companies like GEICO, one of the few companies to still have net positive underwriting profits, increased their direct auto insurance business by 11% in 2015, but still lost 43% in profits. People are getting into more accidents than ever and the companies simply cannot keep up at their current rates.

To make matters worse, the companies' secondary forms of income have faltered as well. Insurance companies will invest a large amount of their cash in fixed income securities with the expectation of a higher return on their investment. In the pre-2008 financial crisis world, fixed income securities, or bonds, were sound investments that were essentially guaranteed a 4% to 6% return on investment. Between 2002 and 2007, U.S. Ten Year Treasury Bonds, the index for which bond yields are measured, averaged a 4.6% return due to relatively normal interest rates.

In the post-financial crisis world however, those same bonds have yielded an average 2.6% since 2008 and currently sit at 1.7% due to historically low interest rates. It is hard to say when relief on that front may come. Experts and analysts have been anticipating interest rate hikes for almost four years now. While a small one of 0.25% did come in December, the uproar that has ensued has made the Fed wary of any more increases. Since that December meeting, the Fed has met twice and has both times rejected interest rate increases, and seems to be sticking to that policy for now.

A bond market with low returns is a major issue for basically every insurer. For example, Progressive held 73.2% of its portfolio or about $15.3 billion in fixed income securities, Allstate held 70.5% or $25 billion and GEICO held $26.6 billion, according to their 10-K filings. Warren Buffet, who’s Berkshire Hathaway owns GEICO, expressed grave concern over the failing of his long time investment strategy just last week in the annual shareholders meeting, saying, "“It looks like [bonds] will be at least unattractive, if not terrible, for a considerable period in the future.”

Faced with few options, the auto insurance companies may have no choice but to hike rates. Though, some recent dealings suggest that has already started. Allstate just last month requested a nearly unprecedented 25% rate hike in Georgia . According to Ratewatch.com, Farmers, the sixth largest auto insurer in the country, has increased rates by double digits in 20 states, and GEICO has also raised rates in every state except two in the past year. Overall, rates increased an average 5.9% in 2015. Just in the first quarter of 2016, however, they have already increased an average of 2.2%.

If more drivers continue to hit the road, and central bank policy remains unchanged, it would seem rate hikes are inevitable. What can you do? Well, the best thing would be to shop around when you renew your policy. A company's biggest competitive advantage is being able to provide the lowest rates while also still being profitable. Progressive and GEICO were one of the few major insurers who still made a profit off underwriting in 2015-- but that can change as well. When you do find the right company, make sure you also apply for all of the discounts you qualify for, and of course, maintain a good driving record.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.