Today's vehicles are far more complex than the first Model T that Henry Ford drove in 1908. Technology has made them safer, more energy efficient and semi-autonomous, but these advances come with a higher price tag when there is an accident. We'll chat with Mark Garrett, director for the insurance intelligence practice at J.D. Power and talk about auto claims trends, how technology and other factors are affecting policy pricing, and the opportunities he sees ahead for the industry.
Patti Harman (
Thank you so much for joining us today for this transformation forum. I'm Patti Harman, editor-in-chief of Digital Insurance. Today's vehicles are far more complex in the first model T that Henry Ford drove back in 1908. Technology has made them safer, more energy efficient, and semi-autonomous, but these advances come with a higher price tag when there is an accident. Today, we're going to chat with Mark Garrett, director for the insurance intelligence practice at JD Power, and we're going to talk about auto claims trends, how technology and other factors are affecting policy pricing and the opportunities that he sees ahead for the industry. Thank you so much for joining us, Mark.
Mark Garrett (
Yeah, thank you. Great to be here Patti.
Patti Harman (
So the last several years have really been quite a roller coaster for the auto insurance industry. Let's start with an overview of what you've been seeing since before the pandemic in terms of coverage, pricing, claims, frequency and claims severity.
Mark Garrett (
Yeah, it has been a roller coaster. That's a great way to describe what we've seen here in the last couple of years. I'd say if we look back at trends prior to the pandemic, insurance pricing had been going up pretty steadily, kind of more in step with inflation. I think we were used to seeing three, four, 5% increases in pricing policies. If you look at long-term trends in claims, I think we've seen similar trends leading up to the pandemic where frequency was declining a little bit. As you said, cars got safer. We saw frequency trending down, severity slowly, I think, trending up, but really all that I think got flipped upside down a little bit. Once the pandemic happened, as everyone's aware, driving basically came to an halt. There weren't as many people on the road, so driving was down. We saw it and claims frequency drop.
(
Interesting though, I think one thing that we saw was there was a rise in fatalities. I think as riskier driving took place, so the average speed limit people were speeding more, a little bit riskier behaviors, but just because there were far less people on the road and I think what ultimately happened was insurers, they were giving people rebates. We saw discounts being given back to customers. I think the overall loss ratio coming out of that year for 2020 was I think one of the lowest we've ever seen, it was like in the mid 50%. I think 55% was the loss ratio, but coming out of that, so if you start then transitioning to what did we see after that? Well, frequency shot right back up, we're still seeing severity increase even after that. We've seen severity just steadily rise and I mean that's really leading us to I think the state of the market that we're in today just because those claim costs have just really risen drastically. I'd say the last two or so years following the pandemic, we saw double digit increases in just the loss ratios. What insurers are actually paying out for those claims went from the mid-fifties up to the mid- sixties, then up to the mid-seventies, and it's kind of just staying around there right now. So it's been a really rough go, I think, for insurance companies just with these claims costs being so high.
Patti Harman (
Did you see a rise in more insurance claims after the pandemic too? You're right. During the pandemic we didn't see a lot, everything kind of just dropped off, but afterwards, even though there still weren't a whole lot of as many people in the road, did you see more auto claims at that point?
Mark Garrett (
Well, from just a pure volume basis, I wouldn't say there were more just because there were less people on the road, but it ramped back up very quickly, I think, once people got back out there. I think coupled with that riskier driving, like we said there was, that impacted some of the severity, more severe accidents happening. So we did see that rebound very quickly once we got over that initial phase of just no one was driving, and then it slowly six months or so later, we started seeing a lot of those trends get back to some of those pre-pandemic levels and now we're seeing severity just continuing to rise. So that's been an area where those claim costs have just been going up and up where frequencies, I think if you look at long-term, trends of that has been pretty steadily coming down a little bit.
Patti Harman (
Okay. Yeah, I remember driving during the pandemic and people would blow past me and it's like they had to have been doing 95, a hundred miles an hour, nobody was on the road and then as drivers started come back, they still weren't slowing down and that was just a little bit scary.
Mark Garrett (
Absolutely.
Patti Harman (
So one of the other issues were the supply chain issues and those were a factor for well over a year or more. I had the privilege of learning about that firsthand a couple of years ago. I had to replace my transmission and boy, talk about sticker shock. I already knew that a transmission was going to be like $2,500 to maybe $3,000 when they told me it was going to be over $7,000, I about died and I worked every source that I had. And people are like, yeah, that's what it's going to cost for your car. So I'm wondering, are some of these supply chain issues more or less resolved now and are they still affecting the price of replacement parts?
Mark Garrett (
Yeah, I think I'd say that no, they're not resolved yet. We're still seeing a lot of these lingering factors stick around that really, I think the pandemic created a lot of these issues. Clearly, idling factories, impacts of that nature. There's still some part shortage issues, things around I think that the UAW strike didn't help things either. You're impacting some of the availability of these parts. So what's interesting is where we've seen these prices really have an impact on the claims, but also from the supply chain, we're still seeing shop backlogs really be a big issue. So you think if you can't get the parts, cars are sitting around these shops longer, these shops are at capacity, they're not getting new vehicles in. I mean I was just looking at this last year where we saw it, it peaked at almost six full weeks to get your car into the shop and this is Q1 of last year and there's always a spike in this at Q1.
(
I think people, there's just pent up demand coming out of the holidays. It's like, okay, now they'll go in and get their car worked on. So there's some pent up demand there. So there's always a little bit of a delay in Q1, but almost six weeks was the average. It was like 5.8 weeks to get your car just to get it in and start those repairs. I mean that's unheard of before the pandemic, it was around a week and a half to two weeks. So we're still seeing the supply chain having this impact on what the consumer sees in that process. They can't get into a shop outside of that Q1 spike. It's still three and a half, four weeks on average, so it's twice as long as it was just to kind of start that process. Then you add in like you said, rising parts costs, rising labor costs and that's also having an impact as well. The technician shortages in the collision industry are certainly driving up some of those labor rates and we're seeing double digit growth parts and labor rates. I mean the overall claim costs are up double digits.
Patti Harman (
At my local garage, I was talking to the mechanics and they were like, yeah, there were parts for their garage that they were trying to order and they were like, this stuff's been on back order for six months. They were just really having a hard time getting some of their supplies too. So let's talk a little bit about some of the major factors that have impacted pricing for insurers and policyholders. So vehicles today have a lot more technology built into them, which is definitely a good thing, but I think it can also complicate the repair process. So what are you seeing from your perspective?
Mark Garrett (
Yeah, the technology is certainly having a big impact and we've seen real growth, what we refer to this advanced driver system, the ADAS technology. We look at some of our automotive studies that we publish where we're looking at the impact of people having quality issues or perceived issues with their vehicle and I mean we look at the incidents of that ADAS technology and on new model vehicles, I mean it's everywhere. It's almost 80% of the people who are at least responding to our service are saying that we've got some level of lane assist, lane keep forward collision warning systems like the more advanced ADOS tech. I mean it's pretty prevalent nowadays. So I think we saw about 80% of our respondents said they've got one of those more advanced features, not just your basic backup cameras, the more advanced stuff, it's not about 80% of the customers we're talking to new vehicle owners.
(
So I think one thing that really comes along with that is there's just different standards when you're repairing a lot of these data technology, there's calibrations, there's kind of new line items that come into that repair and I think an average calibration, I'm trying to think what I saw is between $300-$400, essentially new line items hitting that estimate. Then not to mention that it takes a higher labor rate, that mechanical labor rate's going to be one of the most expensive labor rates that's getting line item on fixing the vehicle. So what we're seeing just in terms of trends is mechanical labor is much more prevalent than it has been in the past. I think in the last five years or so, it's almost doubled. So almost half of claims now are getting some bill rate for mechanical labor and that's the most expensive labor rate and it's gone up considerably.
(
As I talked about just the trends in higher labor costs, so more complex sophisticated repairs requiring more specialty calibrations and different workforces. All that's leading to driving costs up. And another thing that people don't always I think about too is when you think of some of the added costs and claims taking longer, even just the shop capacity and parts availability. So claims take much longer today than they did a couple years ago, and so the rental costs also come into play there. So a few years ago, a claim was taking about 12 days, right around that pre-pandemic era claims people are getting in and out, and about 12 days to have your car fixed. It's doubled now, and we're seeing that in our data industry sources are showing that as well. I mean the claims are taking twice as long, which means we've got a lot more customers maxing out their rental coverage and we really didn't see that as much. Right? Most carriers have maybe like a 30- day rental coverage window and people are maxing out those policies.
Patti Harman (
Yes, that and even being able to find rental cars to keep for a longer period of time, that was a major issue too. Right.
Mark Garrett (
Exactly. Yeah, absolutely.
Patti Harman (
So we've talked a little bit about the fact that there are more semi-autonomous vehicles on the road and I'm wondering is that having an impact on the number of accidents that occur yet? Is that something that you can track and is it affecting the accident severity even?
Mark Garrett (
I've seen a couple reports that show that it is actually reducing the frequency. I think of accidents on those vehicles that have that more sophisticated ADAS technology, and I think there's been a couple reports showing there's pretty drastic reductions I'd say, especially when you have combinations of these. So if you have a backup camera plus maybe like a sensor that's going off and then automatic braking systems built in, you combine three of these technologies and those rear-end collisions are cut in half essentially on a lot of these scenarios. So we are seeing some meaningful drops in these certain combinations of technologies. We're seeing some meaningful declines I think in the claim instance when we compare these to vehicles without the technology. But I think where we're at in terms of is it impacting the overall cost of claims, they're more expensive is the flip side of that. So it's more expensive to fix these vehicles. Even just windshields can have technology embedded into them nowadays. So understanding where the ADAS technology is on the vehicle can play a big part in that and it's always in these sensitive exposed areas, bumpers and things like that that typically get hit. They're very expensive to fix these days. So I think that's where the rising costs I think are still outpacing the lower frequency. So it's still impacting up the claim costs. I think these more sophisticated vehicles,
Patti Harman (
We've seen a lot of different kinds of technology added to cars and I'm wondering what kinds of technology today are basically standard on cars and how are they affecting the price of auto insurance for carriers? I mean, you mentioned the fact that there's a lot of different kinds of technology now that has to be recalibrated and that sort of thing, so how's that affecting the price for insurers?
Mark Garrett (
Yeah, well ultimately a lot of this technology is more expensive, so it's driving up costs, if you look at the trends in just new car pricing, I mean that's a pretty large shift if you look at that trend over time, right? We've gone from a $30,000 car to the high forties, I want to say now in just a really short period of time, almost a 50% increase in the cost of a new car. So I think as you're adding all these technologies, I mean a lot of it's becoming more standard, but it's still optional packages people are getting. So it's anytime you're driving up the cost of the car, that drives up the replacement cost of the vehicle, so you're going to be paying more for insurance, the repair costs are higher. So I think it's still, I don't know that there's a lot of carriers out there from what I can tell that have really consistent discounts for this type of technology. I think the jury's still out. A lot of the insurance companies just want more data to develop these models over time. They just need a lot more information and time to collect all this information, and a lot of these reports are still just kind of getting released today. So I don't know if there's enough data to necessarily warrant a discount. And there's also, it's driving up the repair costs, so the fact that there's still a higher replacement cost and a higher repair cost, we're not really seeing a lot of discounts for these technologies today.
Patti Harman (
Are there other factors that you're finding are affecting the price of auto insurance? I was with a group of people on Saturday and telling them basically what I did, and we were all talking about how much auto insurance has gone up just in the last couple of years. So are there other factors that are affecting that?
Mark Garrett (
Well, I think the primary driver by far is just the fact that carriers are paying out way more in claims than they had been, right? The fact that we're seeing these double-digit increases two years in a row, I mean that's unprecedented. I don't think we've seen that much of a shift in the marketplace so quickly. So I think this technology is certainly playing a big driver of that. Also, being able to quickly adapt to how quickly and dynamically prices were changing on the used car market obviously impacted underwriting in terms of paying off for total losses while used car market when bonkers right after covid, I mean the prices skyrocketed, so they were paying out way more money than they ever anticipated. If their models are showing cars are depreciating at, if we just roughly choose a 10% rate every year's going to depreciate 10%, well no one's accounting for that car rising in value. So it's like even the pricing sophistication upfront, no one's accounting for that. So right away you're paying out these claims at much higher dollar amounts than you ever anticipated. So you got scenarios like that just really created a tough environment. We talked about the rising costs, more rental costs, certainly total losses.
Patti Harman (
Okay, Mark, I kind of lost you there for a minute, so we'll see if you come back. Yeah, we kind of lost you mid- comment there, Mark. So we really have seen a lot of changes in terms of what's going on in the insurance industry and some of the different factors that are affecting how insurers are pricing them and as Mark said, technology is having a major impact both in terms of how it's able to mitigate some of the changes and mitigate some accidents, but it's also, there we go. It's also having an impact on what it costs to replace and fix some of those cars. So Mark, I think you're back now.
Mark Garrett (
Oh, oh goodness. I dropped out there for a
Patti Harman (
Second. It
Mark Garrett (
Looked like you froze and I'm talking,
Patti Harman (
I'm like, I hope I'm so yeah, you froze and so I was reiterating some of what you had said. So we were talking about - that's okay. We were talking about some of the factors that have affected the pricing of insurance beyond the technology piece. So if you wouldn't mind maybe going back and starting with that again, that would be great. Okay,
Mark Garrett (
So my audio, everything cut out my audio and video.
Patti Harman (
Oh my goodness, we did, sorry, you froze.
Mark Garrett (
Yeah, sorry about that. Well, let me try to reiterate what I just said here and rethink what I just walked through. We talked certainly about the rising prices, everything contributing to the rising costs, whether it's more technology embedded in vehicles, all the calibrations and things like that, more line items, estimates growing, the parts costs skying, we're talking about rental costs also increasing as well, paying more for total loss. I mean there's so many factors driving up just the overall pattern, what they're paying in claims. I think one of the things I had just mentioned too is that weather is also having an impact here. You think of just the incidents of these large-scale events. You look several years ago we would average maybe seven, eight events. I think for the last four years we've consistently been hitting like 20 major billion-dollar events having a big impact. And we've been in the twenties now for several years. So I often hear carriers talk about how they get used to these peaks and valleys of addressing these events, but now they're happening all the time and weather can play a big impact driving even accidents on the road. I think I've read 20% of accidents are caused by some type of weather events. They're happening more and more frequently now.
Patti Harman (
I believe that because of how people drive, it doesn't matter what the weather is, they're just driving. I'm like, people slow down and then I feel like it's well, I work in the insurance industry so I already know what's going to happen if there's an accident and all of the other things that come along with it. So I'm willing to be a little bit more careful. Let's shift gears just a little bit and talk about the growing popularity of electric vehicles and I'm wondering if that's affecting the price of insurance coverage in the marketplace and do the coverage and risks for these vehicles differ a little from the more traditional gas-powered vehicles?
Mark Garrett (
Well, we are seeing, I think right now EVs still carry a premium. So as maybe they continue to grow in popularity and sales, maybe we'll start seeing some correction there where they come down in pricing a little bit. But we are still seeing a premium on EVs. So to come back to more sophisticated cars have a higher price tag and justify higher insurance rates, we're seeing that in the EV space as well. So ultimately I think car insurance is still higher for EVs because of that more sophisticated in repair costs are higher replacement costs higher and repair costs are higher. So you think of those two big drivers of the vehicle premium. We're seeing that on the EV side, certainly for batteries impacted, those are incredibly expensive to replace and then you need different safety protocols often do that. You can have a car totaled out because the battery gets impacted. So I mean those types of scenarios I think are keeping those prices high right now. So as there's more access to those repairs and it's just more specialized to work on, it's not every shop has everything they need for EV repairs. So I think once we get more shops certified to work on those vehicles, right, more volume there, prices will come down a little bit, I think we'll see. Maybe those insurance rates come down a little bit, but not quite there yet.
Patti Harman (
Yes. I agree. It's been interesting to watch the adoption or even in some areas people are changing their minds about purchasing electric vehicles. There are a lot of factors to consider with that. One of the other things I want to ask you about is as more of the auto insurance processes become automated, are you finding that policyholders are more or less likely to shop around for coverage? And how is that affecting brand loyalty for carriers?
Mark Garrett (
Yeah, it's the access to digital having an impact. Just to answer that question, we aren't seeing big shifts because I think digital tools for getting quotes have been around for a while. So I think we're seeing subtle shifts there. I'd say people going online using apps to access to quotes, very little shift there over time, we're just seeing big growth in shopping just in general. So I think regardless of whether you're doing a digital or not, the fact that premiums are increasing so drastically for customers, that's just driving a lot of people to shop right now. So we are seeing growth in our shopping. We're getting close to 50% right now is our latest shop rate, I think that we've just released. I mean, that's just a big number to think about. And carriers have even told us that seems low when they look at their own business sometimes.
(
Well, we're seeing more than half our policies look like they're getting shot. So there's obviously ebbs and flows. All these carriers have different customers they go after. So we see a large variation by insurer, but overall for the industry to have about a 50% shop rate, right? 49% is what I think our last result was. So I mean there's a lot of people out there in the marketplace right now and where we see insurers trying to get their arms around that is just really trying to push more value in what they're offering. The whole industry is doing this. So part of it is just an education element too, toward customers letting them know what's happening, what's driving this. It isn't just arbitrarily raising your rates. I mean it's like there's an education element happening there where we've seen some examples of carriers really doing a good job of just assessing what's happening in the market dynamics. Here's why your rates are going up. And I think that's a big challenge right now is just to let customers know. You got to educate them on what's happening essentially.
Patti Harman (
Along with that, are there services that policy holders want just beyond a good price from their auto insurance, do you think?
Mark Garrett (
Yeah, it's interesting because price is certainly one of the biggest drivers of why I'm shopping, why I may pick a brand, but we see that change. Certainly if you're looking at something like a younger insured, a younger monoline auto customer price may be more important of a driving factor than if you look at somebody, an older cohort with multiple policies for example. They might be looking for more comprehensive coverage options. Service is a lot more important I think for that element too. Certainly claims handling too. It's like, Hey, if I need to use this policy, how does this carrier stack up in terms of their claims performance as well? You start having those elements also impact that. We see carriers also really trying to drive up some of their unique offerings, I guess market them much more aggressively. Certainly like telematics programs, right? UBI telematics programs, we see that being messaged a lot more. And when you look at some of the statements, we track and compare what a lot of the marketing messaging maybe as well, and we see a lot of companies, there's companies who are messaging that very heavily on all their consumer touchpoints, right? Sign up for our telematics programs as a way to save money, trying to offset a lot of those increases that are going on right now.
Patti Harman (
With the way that the insurance process has become a lot more digitized. Are you seeing that policyholders are becoming more comfortable with this automated auto insurance process, whether it's buying insurance or filing claims or managing a claim? Are they becoming more comfortable because we use our phones to buy everything from online and that sort of thing, so is some of that transferring over into the insurance space too?
Mark Garrett (
Yeah, it is it, but I think it's dependent on maybe what the task is. So if it's a step, I'll use claims for an example, now we see different adoption of technology depending on what the step is in the process. So if we start with just reporting the claim, we see a higher incidence of reporting a claim in automotive claims. I think they're a little bit more straightforward. There's not as much variability to them, and certainly a simpler claim. Customers are much more likely to report those through a digital means. We see almost a quarter of claims right now reported through a digital channel and some companies, individual companies see even higher rates than that. Some of the people who are pushing these technologies are investing a lot and getting real good workflows down. On the property side though, we see a lower instance that just as an example, so I think you have questions there.
(
These are bigger losses, more variety to these losses. You kind of have questions, just make sure this is covered. It's not a straightforward, I think as an auto claim. So we see much less usage of a digital tool for reporting a claim there, but where we see a lot of usage right now where in the photos being submitted. So I think customers are really okay jumping into those channels, submitting photos, taking those photos, and then certainly the status updating like communication is, I think to me that's the biggest usage case right now for digital. And we're seeing a lot of growth in texting, for example. So even if I still want to deal with people, I can still have a digital channel because I can back and forth email, I can back and forth text. So I think that's where we see a lot of usage on the digital lens, self-service has been kind of stable. We don't see as much growth in some of the newer things that people are trying to incorporate, more texting, quick ways to get back and forth and get answers to a question, for example.
Patti Harman (
I think it helps make some aspects of the entire process a little bit more transparent because you can get information in a number of different ways then too. That's really good. What factors do you think are going to have the biggest impact on auto insurance in the next say 12 to 18 months?
Mark Garrett (
Well, I'd say everything that we're seeing now in terms of a lot of things that are driving up the loss ratios, I mean the more that they can get their arms around some of those internal costs. I mean, a lot of companies for example, I mean there's a tremendous, I think, focus on cost containment right now. A lot of companies kind of pulled back their ad spend for example. That's one area they can directly control that just to keep the overall financials healthy, pulling back on some of the ad spending just because the claims costs are still really high. So I think that's the biggest driver right now that we're probably still going to seem. So these companies have had huge rate increases. I think the industry averaged, what was it, 10, 11, 12% across the industry for rate increases, but yet they're still having combined ratios over a hundred percent, right? They're still paying out more than they're bringing in claims. So yes, they've increased the premiums, but they're still paying out a lot of money there, and I think we're not seeing that completely get more in alignment where they want to be closer to that get under a hundred obviously on the combined ratio. So I think those claim costs are still going to be a big, big driver impacting rates in the next year, I'd say.
Patti Harman (
Okay, great.
Mark Garrett (
Certainly weather, I mean, if you think of property, you know what I mean, the weather events don't seem to be going away anytime soon either. So if you think on the property side, those weather events are still wreaking havoc.
Patti Harman (
And I just saw a report that they're forecasting a more active hurricane season again this year. So that'll be really interesting to watch and see what's going on with that. Mark, we have covered an awful lot in the last half hour. I'm wondering is there anything that I haven't asked you about related to auto insurance that you think our audience should know about?
Mark Garrett (
Yeah. Well, one thing I like to message, maybe just because I work on a lot of our claims studies in our insurance base, just how important it is to get that claims experience and still, yes, we have a lot of digital solutions and I think they work for people who want to adopt a lot of those digital solutions. So there's also understanding the fit of what channels the customer is comfortable in, making sure you're offering them to the right customers because a lot of customers still appreciate showing concern, empathetic, being treated like a person, having some of those personable interactions and ultimately the claims space is still one of the biggest drivers of how I view my insurance company. And it becomes, our data shows that once you have a claim, it is the single biggest driver. So more than the price you pay, more than the other interactions you have and billing and coverage options, it becomes, I had a claim with them. That's the biggest driver of how satisfied I'm with that company. And it's regardless of how long ago my claim was, I mean the lasting power of going through that experience. I mean, you could have a claim five, 10 years ago, and it's still the biggest driver of what I'm thinking of my insurance carrier today. So I just always underscoring that like, Hey, that's an important touch point. You got to make sure you get that right.
Patti Harman (
It's where an insurer really kind of makes good on their promise in terms of, we've sold you this policy and this is what we're going to do now. So yeah...
Mark Garrett (
You're actually using the product, right?
Patti Harman (
Right, exactly. I've covered the claims space for more than a decade, and it is one of the most fascinating and definitely one of the most important aspects of the entire insurance process. So thank you so much for joining us today, Mark, to discuss what's going on in the auto insurance market. Thank you to our audience for joining us as well, and we hope you'll come back for next month's transformation forum when we talk about the use of AI and large language programs. Enjoy the rest of your afternoon.
Mark Garrett (
Alright, thanks Patty.
