American drivers are reporting fewer crashes to their insurance companies than ever before, and nobody knows precisely why.
Fewer claims mean record profits for auto insurers like Allstate Corp. and State Farm Insurance Cos. The unprecedented decline in auto claims — a four-year, 15% drop — has allowed the insurers to reap huge earnings from underwriting, without raising premiums.
In the first six months of this year, Northbrook-based Allstate's sales rose 3% from the year-earlier period. Car insurance premiums, which make up 51% of sales, rose just 2%. But Allstate's net income increased 13%, due to an underwriting margin — premium revenue minus claim payouts and other costs — that one Wall Street analyst called "the best result we have ever seen from the company."
Competing insurers have posted similarly stellar results.
But behind the profit boon lies a mystery: Insurers can't explain the drop in auto claims. And while theories abound, the lack of a clear, identifiable reason is unsettling in an industry that relies on sophisticated statistical modeling to predict its claim payouts. Those predictions are used to set premium rates, to decide whom to insure and to provide earnings guidance to Wall Street.
With no explanation for the drop in claims, insurers can't tell if the trend will continue, leaving many at a loss.
"We can't explain it, therefore, we can't predict it," Glenn Renwick, CEO of Ohio-based Progressive Corp., one of Allstate's toughest competitors, told investors in June.
But Mr. Renwick said there's no mistaking the buzz. Industry-wide, auto-collision claims fell from 6.91 claims per 100 insured vehicles in 2001 to 5.91 claims per 100 insured vehicles in 2005, according to the Property Casualty Insurers Assn. of America.
"There's always a lot of talk about — gee, why?" Mr. Renwick said. "Is it going to go down? Is it going to turn around? This probably is the most dominant theme we have in the business today."
In the past, insurers have seen claim filings rise and fall, but they've never seen such a protracted trend. And, unlike in past eras when improved margins led insurance companies to cut premium rates, rates today are falling only modestly, if at all.
Allstate's auto rates essentially stayed flat last year, rising 0.4%, despite the improved margins. Archrival State Farm, based in Bloomington, cut its rates by an average of 3.7% last year and 4.8% in 2004, a spokesman says, in large part because of reduced claims.
Allstate's auto claim filings have fallen nearly every quarter on a year-over-year basis for the past four years. In the second quarter of 2006, the number of bodily injury claims fell 6% from the same period last year while property-damage claims fell 3.7% in Allstate's standard auto business.
The industry has its theories on why it's paying out so much less in claims each year. The first is that cars are safer today than in the past. Allstate CEO Edward M. Liddy proposed that theory at an investor presentation in June, citing technology in some high-end cars that automatically slows the vehicle when it gets cut off or sounds an alarm when the car drifts across lanes.
"Those things are unbelievably powerful, and they are going to continue," Mr. Liddy said.
But like any single explanation, that one has flaws — mainly, that very few Americans can afford cars with such sophisticated safety devices. The Mercedes CL500, for instance, comes with optional electronic systems to maintain following distance and detect obstacles while parking. Its recommended sticker price: $95,500.
A more plausible theory is based on demographic trends. It holds that baby boomers have reached the safest driving age. People between 45 and 64 represented 33% of the drivers on the road but accounted for just 24% of accidents in 2004, according to the National Safety Council.
"Old drivers are better than younger drivers," Mr. Liddy said at the June presentation. "Until you are about 72 or 75, you get better, not worse."
New road rules may be contributing, as well. Over a decade or more, states have come down hard on drunken driving, reducing crashes. And more states now have graduated licensing programs that restrict very young drivers until they get some practice on the roads. Some do not permit youths to drive at night, or allow driving only with an adult.
The drop in claims doesn't necessarily reflect a decline in accidents; it simply shows that fewer drivers are filing claims after car wrecks. Industry officials are reluctant to discuss this notion, but it seems to be supported by federal data on highway crashes.
NUMBER TOUGH TO DETERMINE
The National Highway Traffic Safety Administration reports that although there are more cars on the road, auto accidents reported to police declined steadily for 16 years, from 6.9 million in 1988 to 6.2 million in 2004. But agency officials do not believe this indicates a steep decline in actual fender-benders.
"We don't think this is a real number," says a spokesman for the agency. He says changing standards for reporting accidents to police, as well as a possible increase in drivers opting not to report incidents where there are no injuries, are masking the true number.
But what that true number could be is anybody's guess.
"It's such a difficult thing to say with any degree of specificity," says James Valverde, vice-president of economics and risk management for the Insurance Information Institute, an industry research group.
Also, in its most recent annual report, Allstate says higher deductibles seem to be prompting policy holders not to file claims. Factors explaining lower claims, the report says, include "an increase in the level of policy deductibles chosen by policy holders, a decrease in policy holder submission of claims for minor losses" and more sophisticated underwriting models.
Mr. Liddy doesn't see any reason why Allstate's reduced claims payouts won't continue. "I think frequencies continue to show long-term positive improvement for the industry," he said at the presentation in June.
