Analysts Estimate Auto Insurance Rates to Rise 6% in 2004

A.M. Best

Marie Suszynski

January 9, 2004

NEW YORK, Jan 07, 2004, (A. M. Best via COMTEX) -- A handful of factors--most related to fraud--are expected to cause automobile insurance rates to rise for the fifth year in a row in 2004, but the projected increase is a slight moderation from what was seen in 2003, according to a new report.

Analysts at the Insurance Information Institute expect auto rates to jump 6% in 2004 as a result of rising repair and medical costs, jury awards, auto theft and fraud, according to their report. On average, the cost for auto insurance nationwide is expected to be $898 in 2004, which amounts to $51 more for each vehicle compared with 2003.

It would be the fifth year in a row that auto rates rise, but the size of the increase is lower than the previous year, the report said. In 2003, auto insurance costs were expected to rise 8.5%, to an average nationwide cost of $847. The average nationwide cost has risen steadily since 1999, when the figure was $683.

Driving up rates are higher costs to repair vehicles, particularly when an accident involves a sport-utility vehicle, Robert Hartwig, the Institute's senior vice president and chief economist, said in a statement. Repair costs are going up two to three times the overall rate of inflation in several states, the report said. Using brand-name parts rather than generic ones ultimately could add $4 billion to $5 billion annually to the cost of auto insurance, because they generally cost 30% to 70% more than their generic equivalents.

Carriers also are being hit with higher auto-injury claims, which are going up by as much as 20% in some states, the report said. Insurers will pay between $15 billion and $20 billion in medical claims in 2004. Typically, it costs $6,000 to $9,000 to treat an auto-accident victim, but the cost can be in the tens of thousands of dollars.

Meanwhile, jury awards continue to be steep. The average jury award in auto-liability cases rose 73% since 1994, to $323,000 in 2001, the Institute said, citing data from Jury Verdict Research. About 60% of auto premiums paid in 2002, which adds up to more than $80 billion, were for liability coverage, Hartwig said.

In addition, fraud and abuse--something states and insurance companies have been working hard to fight--still are major problems in some states and are driving up auto insurance premiums. New York, Florida and Massachusetts in particular are battling huge amounts of fraud. The Institute said loopholes in New York's no-fault insurance statutes cost drivers in the state an estimated $432 million in 2003--almost $1.2 million a day.

However, the New York Alliance Against Insurance Fraud and the Institute previously have said that anti-fraud efforts were causing the average personal-injury protection, or PIP, cost to fall 8.7% in New York during the 12-month period ended June 30 (BestWire, Dec. 16, 2003).

Auto theft is rising, as well. In 2002, the number of thefts went up 1.2%, according to the FBI's Uniform Crime Report. They rose 5.7% in 2001 to 1.2 million auto thefts. That year, auto theft cost an average of $6,646 per vehicle, or $8.2 billion.

Although the Institute listed fraud separately from the other drivers, Dennis Jay, executive director of the Coalition Against Insurance Fraud, pointed out that fraud relates to most of them, including medical care and vehicle-repair costs. "It's not that (the cause for the increase) is all fraud or that fraud is even a major driver, but certainly it's a significant aspect that's putting upward pressure on rates," he said.

A study by the Coalition recently found that convictions for insurance fraud were up nearly one-third in 2002 from 2001. But despite the progress states have made, the overall amount of money the government spends to fight insurance fraud is a "pittance of the estimated size of the problem," Jay said. Also, there's a patchwork of states doing a pretty good job at fighting it, but other states could be doing better. Similarly, some insurance companies pay lip service to the problem, and a large part of the public still tolerates the crime, he said.

"There's absolutely no doubt whatsoever that fraud continues to be a driver, in some states more than others," Jay said. In addition to New York, Florida and Massachusetts cited by III, Jay said fraud also is a major problem in terms of severity in California and New Jersey. "New Jersey has the highest auto rates in the nation, in part because of the level of fraud" in the state, he said.

Copyright (C) 2004 A.M. Best