California may be one of the largest auto insurance markets in the country, but a two-year freeze on auto insurance rate filing spells trouble for insurers and drivers in the state. A return to pre-pandemic driving patterns, increased crash severity, and higher-cost claims have left auto insurance companies in California in a difficult financial position. Bankrate spoke with Vice President Denni Ritter of the American Property Casualty Association (APCIA) to learn more about the state of California’s auto insurance industry and how it is affecting drivers in the state.
The central theses
- The California Department of Insurance has not approved rate filings for auto insurance since May 2020, although over 75 percent of companies selling auto insurance in the state have requested a rate increase, according to APCIA.
- Several insurance companies in California reported claims ratios in excess of 100 percent in 2022, suggesting their claim costs were higher than their incoming premium, according to APCIA.
- Changes made by California auto insurance companies due to their operating and damage losses could make it harder for drivers to get auto insurance.
When did the troubles in California start?
In March 2020, California became the first state to introduce stay-at-home orders in response to the COVID-19 outbreak. It was a decision that changed driving habits in the state overnight — early studies by UC Davis found an estimated 60 percent drop in traffic levels in April 2020, resulting in a nearly 50 percent drop in street collisions.
Because of this reduction in driving habits, the California Department of Insurance directed auto insurance companies to provide premium refunds to drivers. Overall, auto insurance companies paid approximately $2.4 billion in premium refunds to California drivers.
Pandemic response: California halts interest filing
Early in the pandemic, many insurers also withheld or withdrew rate filings that had been submitted to the state Department of Insurance for approval. However, as the pandemic developed and states reopened, riders got back on the road. Statistics from the Federal Highway Administration showed that the number of kilometers driven in 2021 and 2022 was now close to or exceeding the number of kilometers driven in 2019 and 2020.
Nonetheless, the ministry has maintained its stance. In a statement provided to S&P Global in November 2021, the Insurance Department indicated that the pandemic was ongoing and driving habits were still declining.
“People returned to pre-pandemic driving levels,” says Ritter, “and some people developed bad driving habits, such as speeding, not wearing seatbelts, and driving under the influence of alcohol.” -Insurance rates listed, and that certainly applies to the Golden State as well. Specifically in California, a study by the National Highway and Traffic Safety Association recorded a 10.7 percent increase in traffic fatalities in 2021 compared to 2020. The agency reported that 4,258 people died in vehicle accidents in the state in 2021, compared to 3,847 people in 2020.
The APCIA also found that while auto claims involving property damage fell 30 percent in 2020, they rose 60 percent in 2021. Rising accidents mean more claims, which are now also more expensive due to the pandemic’s impact on supply chain issues and historical inflation. And a longer repair time also means more expensive rental car costs while the vehicle is in the shop – Hopper noted that rental car prices in May 2021 are up 95 percent compared to the start of the year. Daily rates in Los Angeles were around $94 per day.
What Are Auto Insurance Companies In California Doing Now?
Auto insurance companies in California have begun to share the challenges of operating in the state. In recent earnings calls, several major insurers including Allstate, Geico, Kemper and Liberty Mutual reported claims ratios in excess of 100 percent in California. That means they’ve paid out more claims than they’ve received in premiums, and without rate adjustments, it’s difficult for auto insurance companies to correct the imbalance.
Normally, auto insurers can balance their exposure, continue paying out claims, and avoid bankruptcy by entering into stricter new contracts or asking for rate increases. But these options are not currently available in California.
That’s because of a 1988 measure. “Proposition 103 turned California into a ‘take-all-comers’ state,” Ritter said. “That means an insurer has to offer you coverage if you’re a good driver in the state and apply for insurance.” This is true even if an insurance company suffers losses and continues to make more claims payments.
Tricia Griffith, CEO of Progressive, said on the company’s third-quarter conference call in November 2021:
The California moratorium on price increases is unfortunate because we don’t think it serves California consumers and you only have a few things to do.
– Tricia GriffithCEO of Progressive
She continued, “There are a couple of levers that we’ve talked about and we’re going to use those tactics to try to slow growth, but we want to be a part of the future California market and we’re going to do what we can to come.” there.”
For progressives, this meant restricting advertising in the state. Other airlines, such as Allstate, have attempted to restrict payment plans or have banned independent representatives from selling their products to consumers. Geico even closed all of its physical storefronts in California, no longer allowing customers to call for a quote. Instead, potential customers must create an auto insurance quote online.
What does this mean for California drivers?
While not being subject to rate increases may seem like a blessing for Californian drivers, the situation has negative consequences. The ongoing situation could make it harder than ever for California drivers to shop for auto insurance policies and see what options are available to them. And the best auto insurance companies in California may be limited in where they can offer coverage to drivers.
This could be especially true for those who do not have access to the internet to search for policies online and have more complicated needs that require a local insurance agent. Additionally, in one of the nation’s most diverse states, nearly 44 percent of Californians speak a language other than English, with 17.4 percent having a low level of English. These drivers might have the most difficult time navigating a phone or online process when purchasing auto insurance or processing auto insurance claims, especially when translation services are not offered or readily available.
According to Joseph Lacher, CEO of Kemper Insurance Company, in the company’s auto insurance report:
What we are increasingly seeing is airlines, including ourselves, becoming less and less willing to write new business, becoming more restrictive from an underwriting perspective and tightening everything they can.
— Joseph LacherCEO of the Kemper insurance company
The final result
What’s happening in California is different than anywhere else in the country. “The unprecedented losses in the auto insurance market, coupled with unprecedented regulatory interest rate relief, have prompted insurers in California to take the unusual step of limiting their exposure to new business,” said Ritter. “This highly competitive industry is no longer competing for new business in the largest market in the country.”
Nearly two years after California first instituted protective measures to prevent the spread of COVID-19, the state’s landscape for auto insurance companies has changed. Drivers in California could soon be faced with a no-win scenario: either rates must increase to keep companies financially healthy, or companies will continue to leave the state, leaving drivers with few options for coverage.