Auto Insurance Seen Returning to Era of Annual Rate Increases

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Major insurers, looking to increase profits and citing higher claim costs, seek to raise fees, executive says.

Los Angeles Times

Californians are heading into a period of annual auto insurance increases as savings from liability reform and improvements in auto safety come to an end, a top industry executive told Wall Street analysts Monday.

That would mark a dramatic reversal from a downward cycle that saw auto premiums in California fall from the third-highest in the U.S. to 20th by 1999.

“I think we are returning to a traditional era where there are rate increases almost every year,” George Joseph, chief executive of Mercury General Corp., told analysts in a conference call.

Insurers also are looking to squeeze more money out of consumers by better enforcing their underwriting rules, a move that allows companies to raise rates without the need for regulatory approval.

One common technique involves more carefully checking the mileage policyholders drive annually, Joseph said. Drivers, sometimes with the acquiescence of insurance agents, frequently low-ball mileage estimates to obtain lower rates. By catching policyholders driving more than their reported miles, insurers can raise premiums to higher, but already approved, rates that match the greater risk.

One method is to use readily available computerized mapping services to measure the mileage between a policyholder’s home and place of work, Joseph said. Another is to enforce rules that require clients to submit odometer readings.

“As underwriting profits start to disappear you start to pay a lot closer attention to your written rules,” Joseph said.

His comments came as Los Angeles-based Mercury announced that its first-quarter net operating earnings, a key measure of profitability for an insurer, fell 24% in the first quarter to $21.9 million, compared with the same period a year earlier. Net income dipped 17% to $24.7 million, or 45 cents a share compared with $29.9 million, or 55 cents per share in the same period a year earlier.

Mercury‘s shares fell 29 cents Monday to close at $34.75 on the New York Stock Exchange.

Joseph blamed declining profitability on an increase of more expensive automobile claims in California as well as a growing number of homeowner claims due to a harsher-than-usual California winter.

Looking to increase profit, Mercury has asked the state Insurance Department for permission to raise rates as much as 6.9% and expects to win approval within two to three weeks.

Over the last few weeks, most major insurers, citing higher claims costs, have sought similar rate increases. Last week, Farmers Insurance, which insures 2.2 million vehicles in California, asked the state for an average 6.6% increase, while the Automobile Club of Southern California’s insurance arm sought a 5.5% rate hike. Allstate, which insures 2.2 million autos, asked for a 6.9% premium hike last month. Last fall, 21st Century instituted a 6.4% increase, partially offsetting a 25% decline over the previous four years.

Consumer advocates hope to block or lessen the size of the increases.

“It really depends on how the insurance commissioner reacts to all the filings by these companies,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “We are going to ask for restraint.”

But Joseph expects these increases to be more than isolated events.

In California, where Los Angeles-based Mercury has 790,000 policyholders, the pace of increases in both medical expenses and wages has picked up in recent years.

Moreover, many of the factors that helped push down auto insurance over the last decade–from safer, air-bag equipped vehicles, liability reforms such as limits on uninsured motorists collecting pain and suffering judgments to a reduction in car thefts–have played through the system.

The 1998 model of the Nissan Maxima, for example, had overall theft losses more than seven times the average for all cars. But after factory-installed anti-theft devices were introduced in 1999, theft losses declined dramatically, according to the Insurance Institute for Highway Safety. The Maxima’s average loss payment for claim fell to just over $5,000 from more than $14,000.

Annual losses from liability claims for insurers operating in California fell by more than $1 billion to less than $4.2 billion from 1991 to 1997, according to state figures. They have since started to climb back up, rising by about 6% annually since then.

Joseph said he doesn’t see any new developments or trends that would work to hold down auto insurance rates.

High gas prices and a slowing economy have done little to dampen traffic, another factor that would reduce accidents.

“I have heard people talking that they may drive their big SUVs a little less,” Joseph said, but he has yet to see any statistical evidence of changed behavior.

Sport-utility vehicles, which because of their size and weight cause more damage to passenger cars, may be the culprits in rising repair expenses for Mercury, Joseph said. Mercury is studying the issue to see whether it should be charging higher premiums for the popular vehicles.

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