COVID-19 Impact on the Auto Insurance Industry
The US auto industry has been affected in many ways by the COVID-19 pandemic, with impacts seen now and to be seen in the future. Changes in auto policy premium rates, bases for calculating risk, technology for information collection, and driver behavior have occurred and will occur.
How the US Auto Insurance Industry Has Been Affected by COVID-19
Fewer Miles Driven by Fewer Drivers
- Drivers who commute to work are largely staying home due to state government COVID-19 response rules.
- The rules have led to drivers using their personal cars less than before COVID-19, including millennial drivers.
- One study showed that mileage and trips declined by 40 percent.
- Auto insurers do not know whether drivers will continue to work from home, will return to commuting by personal car, or will use public transportation when the pandemic rules are lifted. The data on these outcomes will drive future auto insurance rates.
More Personal Cars Being Used for Business
- Although auto insurance policy holders are driving less for personal reasons, "that isn’t always the case for commercial vehicles. Amazon, GrubHub, delivery services and more are supplying people stuck at home with their essentials, like groceries. This means the increased use of personal cars for work."
- During the first three months of the pandemic (March, April, May) restaurants remained closed by state government rules. Some of these restaurants turned "to home delivery services since they cannot allow patrons to enter their facilities."
- If drivers are using their personal cars for business purposes like delivering for Amazon, restaurants, or other businesses, then the drivers need to purchase commercial insurance. If a driver gets into an accident, those drivers "would want that covered under commercial lines coverage because it typically isn’t covered under personal lines coverage."
- Auto insurers don't know whether Amazon, GrubHub, and restaurants will continue to offer home delivery by personal cars once the pandemic ends. The decisions made by these businesses will affect the sale of commercial insurance coverage to drivers using their personal cars for business.
Fewer Claims Reported
- The reduction in miles driven "has resulted in fewer claims and higher profits for auto insurers."
- There are fewer auto accident claims from all drivers, including millennial drivers.
- However, many states are seeing increases in driver speeding behavior, violating speed limits on highways even more than before because traffic has decreased and roads are less crowded. The increase in speeding behavior may be captured by new insurance technologies (see below).
Discounts, Refunds, and Credits for Policyholders
- The Insurance Information Institute reported that auto insurers will return $10.5 billion in premiums and benefits to policyholders in 2020. "Policyholders will receive the paybacks in various forms — such as premium percentage discounts, credits, and added coverages — depending on their insurer." Millennials will receive the discounts, credits, and added coverages along with other policyholders.
- Insurance companies participating in the auto insurance premium paybacks include Liberty Mutual (refunds of 15 percent to personal auto insurance customers on two months of auto premiums), State Farm (giving $2 billion in rebates to auto insurance policyholders with the company between March 20 to May 31), Progressive Insurance (giving a 20 percent credit for customers' April and May premiums), along with Allstate, Geico, and Nationwide. The rebates, discounts, and refunds apply to all policyholders.
- USAA announced premium refunds also. “Every member with an auto insurance policy in effect as of March 31, 2020, will receive a 20 percent credit on two months of premiums in the coming weeks.”
- Liberty Mutual and Farmers Insurance companies are also giving refunds, rebates, and/or discounts.
- Insurance companies do not know whether driver behavior will change when the pandemic ends, and have not set new rates for auto insurance.
Future Auto Insurance Rate Changes Based on COVID-19
- Future auto insurance rates will be calculated based on experiences during the COVID-19 pandemic period, including several factors: annual mileage driven, claims experience, policyholder hardship, and distracted driving rates.
- A study by New Initiatives reported that during the pandemic, the number of trips and distances driven decreased by 40 percent, the total distance of short trips increased, public transportation for commuting fell to 0 percent, fewer people drove together which led to decreased carpooling, and fewer people attended social events. These changes in behavior will result in rate changes going forward.
Fewer Americans Shopping for Auto Insurance
- Fewer people have been shopping for auto insurance during the COVID-19 pandemic. According to the Lexis-Nexis Insurance Demand Meter, "new business volume growth ... decreased at unprecedented rates, shrinking -10 percent in March and -14 percent in April."
- People buy auto insurance through three insurance shopping channels: direct, exclusive agent and independent agent. During the first few months of the pandemic, "the direct and independent agent channels took the biggest hits ... at -26 percent and -24 percent respectively. By contrast, exclusive agent carriers saw a far more modest decline of -9 percent."
- "The pandemic has had the biggest impact [on Millennial] shoppers ages 35 and younger." Sales growth decreased by more than -20 percent among this demographic group. "Shoppers ages 55 and older kept on pace and their shopping even surged by 32 percent around the time of stimulus checks. Since then shopping has leveled off to the pre-COVID growth rate, according to the LexisNexis data."
- Auto insurers don't know how to predict consumer shopping behavior going forward after COVID-19. They have to wait and see what drivers do about renewing their current auto policies or looking for new ones.
Future Changes in Auto Insurance
Possible Change to Usage-Based Insurance (UBI) Premiums
- The Covid-19 pandemic has emphasized an existing discussion among insurance professionals about the need for Usage-Based Insurance (UBI), rather than insurance based on guessing about customers' annual mileage, types of trips, and other risk factors.
- Fairness of insurance rates is being discussed.
- "...Not everyone is driving the same miles, and not everyone is a careful driver. How can insurers reflect that risk level into their customers’ premiums?" This is one of the questions being debated.
- UBI would determine a different insurance package for each customer based on "how much the customer is driving his/her car (Pay As You Drive--PAYD) and the customer’s driving behavior (Pay How You Drive--PHYD)."
Creation of a Different Algorithm for Insurance Rates
- Fewer cars on the road has not meant fewer risks. The principle that fewer cars meant fewer claims has not proved to be true during COVID-19. Insurers may have to alter the way they calculate risk.
- A report by Digital Insurance showed that (1) in "New York City, traffic volume decreased between 78 percent and 92 percent compared to January, but there was a 57 percent increase in speeding violations in the ten days following the Governor’s stay at home orders; (2) in Minnesota, traffic fatalities increased by about 50 percent when traffic was down 50 percent; and (3) in California, during the lockdown, collisions increased following a rain event and were blamed on people driving at higher speeds.
- Auto insurers have not decided how to use this information to calculate future insurance rates.
Changes in Claim Resolution Methods and Tech
- Because of social distancing, claim resolutions during COVID-19 have been relying "on digital technologies such as photo estimating tools" and photographs. Insurance adjusters have not been traveling to the sites of accidents during COVID-19. Instead, insurance companies have relied on drivers to upload photographs, accident reports, and other information when submitting claims.
- New, "sophisticated mobile telematics solutions can not only provide real-time crash detections, but also provide a detailed report by analyzing the motion sensor data and associated contexts." This technology will change the way accidents are perceived.
- "Mobile Telematics" are forms of mobile-based data collection using smartphones and other devices to learn about driver behavior.
- Three key technologies will likely be used to assure collection of accurate mobile-based UBI (PAYD & PHYD) measurements.
- The three key technologies are (1) Transport mode classification (motion sensor data collected by the mobile phone), (2) Driver/passenger detection data, and (3) Driving behavior insights based on "intelligent and accurate driving scores to measure driving behavior".
- The information transmitted to auto insurance companies about driver behavior will be used to calculate individualized auto insurance policies for each driver.
We gathered information from a variety of sources about impacts of COVID-19 on the US auto industry. Most of the information applied to all auto insurance policyholders, rather than only to the demographic of Millennials. Thus, we reported information as applying to policyholders in general. Most of the publications and articles we located about the effects of COVID-19 on auto insurance did not present the results of their research via separate demographics. The results were aggregated. However, a few of the facts and statistics were focused on behavior of Millennials (and Boomers), and we pointed them out in our report. We searched for information specifically targeting Millennials and auto insurance, but did not find any sources that presented such information.