State of Arizona’s car insurance rates up despite drop in claims

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Losses in stock market may be the reason for increases

Tucson Citizen

Arizona drivers are paying increasingly higher rates for car insurance despite declines in the state’s accident rate and the number of claims filed.

Insurance companies say the increase is mostly due to a spike in the cost of automobile repairs, but a consumer advocacy group says drivers are making up for the insurance companies’ losses in the stock market.

In 1998, when insurance companies turned an average 6.9 percent profit, there were only 27 rate increases filed with the Arizona Department of Insurance. Losses started mounting for insurance companies in 2000 and so far this year insurance companies have filed for 191 rate hikes – a 600 percent increase.

What’s driving the spike in insurance hikes?

“Like many investors, the insurance industry lost its shirt on Wall Street and now it’s turning to policy-holders to make up losses,” said Doug Heller, senior consumer advocate at the Foundation for Taxpayer and Consumer Rights. The southern California-based group monitors insurance rate and other consumer trends.

“A substantial part of the insurance industry profits comes from investment income,” Heller said.

The insurers say the stock market losses played a minor role in the rate increases.

“Like every other company, insurance companies invest their reserves and policy holder protection funds. If the stock and bond markets do well, we can offset (the rates),” said Tom Brethauer, state underwriter administrator for State Farm. “That’s why we reduced rates from 1970 to 2000.”

But rates at State Farm Mutual, the state’s largest insurer with nearly 16.6 percent of the market, jumped 5.9 percent and 4.3 percent in 2001 and 2002, respectively.

Farmers Insurance Co. of Arizona, the state’s second-largest insurer, also said market performance played a role in rates, as have changes in the interest rates.

“We invest very conservatively . . . with a small percentage in stocks. Much of it is in fixed rate of return. As interest rates have gone down, we’ve had losses,” said Kerry Hayden, government affairs representative for the company.

“If we take in $1 (in premiums) and pay out $1.08 in claims, we can offset some of that with our investment income,” she said.

Farmers cut rates in 1998 and 1999, but they were on the way back up in 2000 with a half-percent increase in March and a 6.5 percent increase in October. A 2.9 percent increase hit in 2001 followed by two this year for 6.5 percent and 3.6 percent.

James Frederickson, executive director of the Arizona Insurance Information Association, agreed investment income has contributed to rate increases.

“In past years, investment income has enabled insurance companies to lower rates and pass investment income benefits on to the customer,” he said. “But investment income hasn’t been there in the past few years.”

However, he said the leading cause of premium increases is the damage accidents cause to people and vehicles.

Though the number of accidents per 100,000 people has dropped from 2,525 in 1998 to 2,473 in 2001, the cost to make repairs has shot up 33 percent in the last five years. These are for police-reported accidents involving injury or at least $1,000 in damage.

“That’s big,” he said.

AAA Arizona’s director of insurance, John Lawson, agreed.

He said that while investment income helped offset increases in prior years, the stock market drop combined with increased costs is forcing companies to raise rates.

Newer vehicles with multiple air bags really push repair costs up, he said.

“In property damage liability we’re taking a severe beating,” he said, adding that AAA‘s American Commerce Insurance is underpriced by about 24 percent in property damage, 11 percent in collision and 27 percent in comprehensive coverage which includes glass.

“We’re surgically looking at where we need to raise rates,” he said.

More hikes, higher rates

Arizona’s automobile insurers turned profits ranging from 3.1 percent to 6.9 percent from 1996 through 1999, but faced losses of about 1.3 percent in 2000, the latest year for which complete data are available. As a result, insurance companies filed numerous rate increases with the state’s Department of Insurance.

In fact, the number of rate increases filed jumped from 32 in 1999 to 191 in 2002.

This means higher rates for consumers.

Insurers in the state have filed 98 rate changes with DOI to take effect from July 2002 through March 2003. Of those, 94 were for rate increases.

The average increase was 8.59 percent.

Arizona’s Department of Insurance does not have authority to approve or reject rate changes filed by insurance companies so long as there is competition in the market. This was based on the enactment of the open competition rating law in 1980.

State Farm Fire and Casualty, the company’s second-tier insurer, filed for two rate increases in 2002, a 4.4 percent overall increase in March and an 8.8 percent overall increase in September.

“Because we were writing applications (for insurance) that had accidents and violations substantially exceeding what we write in the mutual, we adjusted the rates. We didn’t feel we could wait six months to make the adjustment,” Brethauer said. “We’re beginning to see an increase in the number of claims and primarily an increase in the cost related to physical damage.”

Information from the Insurance Research Council, a nonprofit organization supported by property casualty organizations, supports Brethauer’s claim.

The IRC studied average loss costs and claim frequency from 1980 to 2000, the latest year for which figures were available. It found that Arizona insurers paid out an average of $686 per claim in 1980 for physical damages vs. $2,618 in 2000. Nationwide in 1999, the average claim was $2,441.

Declining claims, rising costs

In general, the study found the costs were increasing even though the frequency of claims per 100 cars has decreased.

Arizona’s 3.85 property damage claim frequency in 2000 was its lowest rate since 1993’s 3.68 and was lower than the nation’s rate of 4.13. Yet the average payout climbed $945 from 1993-2000 to $2,618.

Bodily injury claims, the study said, showed a similar trend.

The claim frequency of 1.50 per 100 cars was the lowest Arizona has seen since 1985, yet the average claim loss for bodily injury jumped from $6,275 in 1985 to $8,425 in 2000. Nationwide the rate was 1.11.

“You could say that claims are the big factor driving insurance costs to the extent that claim costs are rising and we can expect to pay more for auto insurance,” said Beth Sprinkel, senior vice president of IRC.

Farmers‘ Hayden also said comprehensive coverage is the cost driving premiums up.

Farmers filed a rate increase for 6.5 percent in February and another 3.6 percent increase took hold in October. No rate increases are planned for the first half of 2003, Hayden said.

Other factors contributing to rising premiums are jury awards for noneconomic damages and a recent Arizona Supreme Court ruling allowing people injured in an accident to collect from both their medical insurance and their auto insurance, AIIA’s Frederikson said.

Auto premiums vary widely for single males, couples

A state survey finds that drivers can save thousands of dollars annually by shopping.

Customers seeking to combat the rising cost of auto insurance should heed the advice of the Miracles’ song “Shop Around.”

Arizona’s Department of Insurance found there was plenty of competition in the state in 2001, with 124 insurers actively seeking and writing auto policies.

When the insurance department sought price quotes for an unmarried male, 21, driving a 2002 Ranger XLT pickup, quotes ranged from $539 to $4,451 a year for the same coverage.

Married, older drivers will find a similar range of prices. The quotes for a married couple, age 48, driving a 2000 Ford Explorer and a 2002 Ford Taurus, ranged from $448 to $3,369.

All quotes were for a combined single limit of $300,000 for bodily injury; $ 50,000 property damage; $5,000 medical with a $100 deductible for comprehensive and $200 for collision.

The complete auto price comparison is available at

Doug Heller, a senior consumer advocate for the Foundation for Taxpayer and Consumer Rights, suggests the state needs to have stronger control of the insurance industry.

Dennis Howard, executive director of the Insurance Consumer Advocate Network, agrees.

His organization has posted a proposed Policyholder Bill of Rights at

It suggests that insurance providers be allowed to file for rate increases of 5 percent or less once every 12 months. Increases exceeding 5 percent a year would require full approval of the state’s insurance department and would be subject to a full accounting audit.

Howard suggests policyholders lobby lawmakers to change state laws, which he said might help control premium increases.

But price isn’t the only factor. Service, especially how insurance companies handle claims, also figures into insurance costs.

The Arizona Collision Craftsmen’s Association, which represents collision repair centers in the state, annually ranks insurers based on the price of the premium and service.

Statewide and in Pima County, the top five insurers were State Farm, Farmers, USAA, Hartford and Prudential.

J.D. Power also rates auto insurers. The latest ratings at show Amica insurance as the top company in the nation.

Amica scored five out of five points in all categories: overall experience, coverage options, pricing competitiveness, claims handling and satisfaction with representative.

State Farm also fared well, achieving four points or better in all but the pricing competitiveness category.


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