The Path Ahead for the Auto Insurance Market

The Path Ahead for the Auto Insurance Market

The severity crisis

In the wake of the worldwide pandemic, a swelling money supply combined with supply chain struggles paved the way for inflation to surge at levels previously unseen since the early 1980s. Over four years, from October 2019 to October 2023, the auto insurance market saw the cost of motor vehicle maintenance and repair grow 31%. Down the line, property damage and collision severity trend estimates reached as high as 20% in 2022.

It’s important to note that inflation isn’t the only reason for rising costs. The increasing technical complexities of motor vehicles has led to carmakers requiring stricter adherence to original manufacturer guidelines for replacement parts and repairs. Plus, new mandates for vehicle systems require that they be scanned for faults after ever repair. Tighter restrictions and specifications have limited the use of cost-efficient aftermarket parts for repairs, forcing insurers to pay the premiums for original equipment manufacturer’s replacement parts, further driving up severities.

Additionally, since the start of the pandemic, the cost of used vehicles has jumped at an even greater rate than that of auto body work. While we can attribute a portion of this rise to inflation, there is also an increase in litigation rates that plays a major role. Industrywide liability claim closure rates reveals a slowdown in claim closures for 2022, which suggests that more attorneys and legal teams are holding claims open for longer, driving severities even higher. 

Florida’s House Bill 837, a tort reform act aiming to temper growing damage awards and increasing auto insurance market costs, came into play as of July 2023. The law has driven notable change, including repealing one-way attorney fees, adjusting the “bad faith” framework to benefit insurers, reducing the statutes of limitations for cases involving general negligence, and providing a framework for juries to utilize when awarding medical damages. While it’s still too early to determine the full extent of the bill’s impacts, it’s possible that it may lead to heightened litigious activity in neighboring states as claimants aim for more favorable verdicts elsewhere.

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