Auto Premium Credits
No doubt you’ve seen on the news that auto insurance companies are beginning to return premiums to policyholders for the months of April and May due to the coronavirus.
Some of our carriers have already made announcements, while some are still reviewing actuarial numbers and are formulating a plan for the best plan of action.
Whether announced on the national news or not, regardless of who your auto insurance carrier is, most auto insurers will be making adjustments in favor of policyholders due to Covid-19 and the resulting stay at home orders and business closures.
I am not a carrier actuary, but to over simplify, the average insurance company has a goal to spend exactly one dollar for every dollar in premiums that are paid. Most spend in the neighborhood of 30 cents out of each dollar of premium collected, leaving 70 cents to pay claims. This is referred to as their combined loss ratio.
Should the insurance company end up spending 1.03 for every dollar, that is a combined ratio of 103%. In that situation the insurance will realize a need for a 3% rate increase in order to move the loss ratio back down closer to 100%, or spending $1.00 for $1.00.
Conversely, if they only ended up spending 0.95 (95% combined loss ratio) then they made a 5% underwriting profit and will reduce rates in an attempt to get back closer to 100%.
Profit is made on the “float”, or the returns on the premiums between when they come in, and when they go back out. (This is how Warren Buffet supercharged Berkshire Hathaway by the way)
What does this have to do with Covid 19? The majority of American’s cars all of a sudden parked which will lead / has led to an instant drop in auto claims, thus a big drop on personal auto loss ratios.
The point? Whether insurance company X cuts refund checks tomorrow, company Y discounts premiums for certain months, or waits to see how the loss ratios end up to make adjustments, or all of the above…..the premium adjustments will even out.
In addition, all of our carriers (whether they have a plan announced yet or not), have made billing due dates and bill plans flexible, are granting underwriting exceptions, and will not cancel policies for non-payment of premium.
Hope this helps. Any questions please let me know.
Joseph D. Beck, CIC, CPRM, VP
