As insurers like Progressive try to catch up with auto insurance loss severity trends with rate hikes, delays in getting filing approvals in some states may prompt other actions until rate adequacy catches up with claims trends.

Among them is the ability slow down advertising, according to Tricia Griffith, chief executive officer of Progressive, who described Progressive’s overall success in getting out ahead of loss trends early with aggressive rate actions throughout 2021 during an Investor Relations call last week.

“We look at each state, and we were able to turn on and off local advertising pretty quickly. … As soon as we believe we have the rates right and that we can turn on media to get more new business at our allowable cost, we will do so. But it’s really dependent on each state,” she said. “We want to do that.”

For the most part, rates are climbing up to where they need to be, Griffith and other executives suggested throughout the event, although when analysts pressed for more details on some states—Texas and California among them—they repeatedly referred to “other levers” available to maintain profitability, including adjusting media spending.

One analyst noted, for example, asked about Progressive’s go-forward strategy in California, a state where Progressive’s participation is small compared to others but also one in which the carrier’s pricing requests have not be approved.

“The bottom line for any regulator is they should demand adequate rates. And we need to get adequate rates on the street in California—in every jurisdiction for that matter. So we’re going to continue to work with California. And there are a handful of other states where we continue to go back and forth,” she said.

“Our goal is to be open and available for all consumers. And if we’re open and available, that helps with affordability in the long run,” she said. “In the meantime, we have some levers that we can use to slow down growth, whether it’s local advertising or bill plans, underwriting restrictions and some agents incentives, we will do that in the states where we need rate. We do need rate in California, but we will continue to work with the regulators there to prove our case,” she said.

During the call, held on the same day that Progressive released the 2021 annual report, Griffith and other executives revealed that the carrier was able to achieve a publicly stated financial goal of making at least 4 cents of aggregate underwriting profit in any given calendar year. In order to do so, the company had to stray from a typical strategy of “taking small bites of the apple,” Griffith, referring to very small levels of rate hikes. According to a chart of rate changes displayed at the beginning of the call, Progressive instead took rate changes averaging 4.8 percent per state in the second quarter of 2021 across 11 states, followed by 5.9 percent on average per state across 20 states in the third quarter and 6.8 percent change per state on average across 19 states in the fourth quarter.

Progressive’s personal auto aggregate rate change was 8 percent for all of 2021 across all states, and Griffith said the insurer took another three points of rate in January 2022.

“It’s nice for consumers to have stable rates. So small bites to me, and I don’t think there is any great definition, is 1 percent here, 1 percent there. I never like to take 6.8 percent or ever double-digit percentage because [that] affects our new business and could ultimately affect our renewal business as people get increases.

“That to me is a larger bite. But…we saw these dramatic trends, and we needed to get out in front of it.”

Dramatic Change, Dramatic Action

The dramatic trends related to changes in loss severity, in particular, spikes in the costs to repair and replace damaged vehicles, Griffith explained, with the CEO and other executives repeatedly referring to Progressive’s knack of being first to market with rate responses and the reactiveness of its six-month policy terms as advantages over competitors. Later in the week, analysts at Fitch and representatives of the American Property Casualty Insurance Association gave similar assessments of inflationary trends that shocked the auto insurance industry as frequency trends return to pre-pandemic levels.

Among the data points in report titled, “Auto Insurers Struggling to Keep Pace with the Highest Inflation in 40 Years,” APCIA noted:

• Private passenger automobile loss ratios spiked from 55.6 year-end 2020 to 72.2 in the first three quarters of 2021, reaching the highest level compared to year-end loss ratios since 2010 (based on S&P Global Markets Intelligence Data).
• Private passenger auto physical damage loss ratios in the third-quarter of 2021 reached a 20-year high (S&P Global Markets Intelligence data).
• Prices for new vehicles rose 11.8 percent last year, the largest rise since 1975.
• Prices for used vehicles rose a record 37.3 percent.
• Higher rental rates and longer average repair times are also driving higher auto insurance costs. The average length of an insurance replacement rental rose by 23 percent, from an average of 12.3 days in the third quarter of 2020 to 15.2 days in the third quarter of 2021 (based on Enterprise Rent-A-Car’s third-quarter U.S. Length of Rental report).
• Auto physical damage losses increased 60 percent in 2021 after a 30 percent drop in 2020 (based on S&P Global Markets Intelligence Data).

The APCIA report reviews the auto and auto parts supply and demand changes that contributed to these data points, and also suggests that Americans have embraced riskier driving behavior since the start of the pandemic, such as impaired driving, speeding, and failure to wear a seatbelt, citing a crash factors report from the National Highway Transportation Safety Administration.

In its report, “U.S. Auto Insurer Underwriting Results Take A Negative Turn,” Fitch Ratings notes that personal auto underwriting results deteriorated sharply in 2021, calculating an aggregate combined ratio of 96.3 for 10 publicly traded insurers, up 8.3 points from 88.0 in 2020. “Carriers are adjusting prices upward to offset the return to more normalized claims frequency and a persistent rise in loss severity. However, the magnitude of rate increases may be hindered by regulatory constraints and competitive forces, with inflation and supply chain issues continuing to boost incurred losses,” Fitch Ratings says.

According to table in the Fitch report ranking carriers by their GAAP combined ratios, Progressive and Allstate wound up in the middle of the pack, both reporting 95.4 combined ratios for personal auto in 2021. Mercury General, Horace Mann, and GEICO has slightly higher combined ratios (96.0, 96.1 and 96.7). Kemper, with a bigger nonstandard auto book did the worst of the 10 publicly traded auto insurers analyzed by Fitch, with the only underwriting loss for the group, a swing of 19.2 points in its combined ratio from 2020 (93.7) to 2021 (113.0)

The nation’s largest auto insurer, State Farm, also reported a swing from an underwriting profit in 2020 to an underwriting loss, with at 16.5 point reversal from $3.5 billion profit in 2020 (8.3 percent of earned premium) to a $3.4 billion loss (8.2 percent of earned premium) in 2021.

Across the industry, Fitch expects premium rates to rise significantly in 2022, promoting stabilization in results. “However, performance improvement could be muted by further volatility or rising claims frequency trends and limited change anticipated in severity patterns,” Fitch said.

A Better Mousetrap

“While the increase in frequency did not surprise us as people started driving more, what was a bit of surprise were the increases in severity, especially the cost to repair and replace vehicles. It was these rising trends that forced us to increase rates,” Griffith said during the Progressive event.

“In addition to rate changes, we also had to make some difficult decisions to reduce expenses and increase underwriting scrutiny to hit our profitability goal of a 96 combined ratio, [with] the expected impact of reducing growth.”

One of those expenses is marketing. “Thoughtfully, we adjusted our media spend when necessary to ensure our expenses and growth aligned with our profitability goals. Reducing our advertising spend is not something we like to do but was necessary under the circumstances,” the text of Griffith’s letter to shareholders in Progressive’s annual report reveals.

That disclosure comes in a section of the letter describing four strategic pillars that guide the company, one of which is Progressive’s strong brand built upon characters like Flo and Dr. Rick—and aggressive marketing in a typical year. While the report describes rise of the Dr. Rick character in Progressive’s television commercials—and even mentions the sellout of limited-edition book that purport to be authored by the “world’s leading Parentamorphosis expert” on Amazon (titled “Dr. Rick Will See You Now”)—the marketing pillar wasn’t the one that executives focused on during the Investor Relations call. Instead Griffith introduced John Curtiss, national product development leader and Kanik Varma, General Manager, Personal Lines for the Western Region to give a presentation on the execution of the fourth pillar—competitive pricing. (Progressive’s other strategic pillars center on people and culture and addressing the broad needs of customers).

“History has shown that following times of industry disruption, we have grown our personal lines business faster than our competitors with better profitability,” Griffith said. “We believe we have built a better mousetrap,” allowing Progressive to “react faster and we believe more accurately than the industry as a whole,” she said, introducing Curtiss to review the science of personal auto pricing, and Varma to talk about how product managers move forward to leverage the pricing indications.

“In our personal auto business, it is very common for us to do hundreds of rate revisions per year….This is an area we have invested significantly in over the years to ensure we have industry-leading speed to market and the agility to adapt our resources to meet the dynamic needs of the marketplace,” Curtiss said.

Varma said that product managers are tasked to “grow as fast as you can at a 96 [combined ratio] objective,” reminding listeners that the 4-point underwriting profit goal is a composite calendar year target number. “At the macro aggregate level, operationalizing this objective is like riding a wave. It requires a very delicate balance: [If you] go too fast with rate and you will be ahead of the market and compromise growth. However, if you move too slowly and fall behind on rate, it’s incredibly hard to catch back up and you will miss profitability targets,” he said.

An important facet of the product manager’s job involved developing a deep understanding of individual state regulations and the time it takes to get rates approved, he said.

Displaying a heat map of the U.S. indicating different approval mechanisms (file and use, use and file and prior approval), Varma said that product managers “deploy different strategies to manage rate revision length risk in states where we aren’t afforded the flexibility to change rates as often as necessary to accurately match rate to risk. Our product managers typically act earlier and more conservatively to ensure we have adequate rates while making sure they are not excessive” in those state, he said. “They also have a full toolkit of levers available to deploy to protect the book and meet their target margins,” he said, echoing comments from Griffith and Curtiss about underwriting restrictions, payment options, product segmentation and expense levers.

During the Q&A portion of the call, several analysts asked Griffith whether personal auto rates are where they need to be at this point. “We’ve had some successes with some of the regulators,” she said, giving the example of Texas, where regulators previously had objections to filed rate changes. “We went back and forth with a lot of data, came to an agreement earlier this month, and both of those approvals are done and effective… And then we’ve put another rate increase in February. So we feel good about states like Texas where we’ve had great conversations with our regulators, and we can get the rates on the street.”

“That allows us to open up local advertising, our bill plans, our underwriting restrictions,” she said.

“It’s a mixed bag depending on each state. So we’ll continue to watch the trends. The trends in [prices for] used cars and new cars still continue to actually outpace even pre-COVID levels,” she said.