McKinsey : How the coronavirus could change US personal auto insurance

Executive summary :

The COVID-19 pandemic could cause structural changes. Understanding the range of scenarios can help carriers plan for an uncertain future.

Auto insurance may never be the same again after COVID-19

The COVID-19 pandemic continues to expand, and the United States has now surpassed all other countries by number of cases. Few anticipated the pace at which the US economy would shut down and physical distancing would become so pervasive. Like all industries, insurance has been materially affected: since the onset of the pandemic, it has lost $760 billion globally in market capitalisation, the third highest among all industries.

Winners and losers

Across the US insurance industry, the impact will be uneven. Life and annuity carriers will be the hardest hit because of lower interest rates. Some segments will be affected by rising mortality rates. Commercial property and casualty (P&C) businesses will shrink because of the economic contraction and rising unemployment. Some P&C lines will experience spikes in losses from business interruption, directors and officers, event cancellation, medical malpractice, and trade credit, among others.

Widespread change

At first glance, the impact on US personal auto insurance appears to be more muted. The segment’s growth and performance have been mostly impervious to recessions over the past 20 years. However, the pandemic could precipitate structural changes in the market. For instance, mobility trends may pause if more people choose to own a car and drive everywhere because they think ride sharing and public transportation are too risky during a pandemic. Historically low oil prices will make driving much more affordable. And, while less driving during the shutdown period will result in a lower frequency of accidents overall, cities may see higher frequencies, as less congestion could lead to increased speeding.

The what if scenarios

There remains much uncertainty about the full impact of COVID-19. In this article, McKinsey explores four scenarios (including a ‘black swan’ worst-case scenario) based on several unknowns: What if the economic impact is worse than anticipated, caused by longer lockdowns or more difficulty restarting the economy? What if trauma associated with the pandemic leads to fundamental behavioral changes?

Winds of change

There is a chance that personal auto insurance will experience the same volatility seen in the 1970s and 1980s, when nonstandard risk segments, assigned risk pools, and uninsured motorist surcharges threatened the industry’s viability.

Indeed, in 1985, one of the leading auto insurers nationally was a state underwriting plan with a 140% loss ratio. Could the current pandemic lead to similar levels of strain on the industry? The answers will have implications for how insurers move forward.

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