California’s private passenger auto (PPA) insurance market has seen numerous changes in recent years, with several trends shaping the landscape.
One of the most notable changes has been the moratorium on PPA rate increases, put in place by the California Department of Insurance (CDI) at the start of the pandemic to protect consumers. After Governor Newsom’s shelter-in-place order on March 4, 2020, the number of miles driven dropped significantly, along with other notable measures of risk. As insurers writing PPA and other impacted lines of business faced a reduced exposure to loss, the California insurance commissioner released bulletins 2020-3, 2020-4,2020-8 and 2021-03 (“Premium Refunds, Credits, and Reductions in Response to COVID-19 Pandemic”) requiring insurers to make appropriate adjustments and refund a portion of customer premiums. Even after the remaining COVID-19 restrictions in California were lifted in June 2021, the moratorium remained in place until October 2022, when the first rate increase approval was granted to Allstate.
During the moratorium period, inflation throughout the U.S. and global economies — driven in part by pandemic-fueled supply chain issues — resulted in a rapid increase in PPA severity, particularly around material damage coverages. Early in the pandemic, injury severities also rose drastically due to the drop in accidents that typically occur at lower speeds in congested traffic. While this severity was expected to return to pre-pandemic levels along with miles driven, industry data show that injury severity has remained high. Despite frequency returning to a “new normal” at slightly lower levels than before the pandemic, severity increases in the PPA market have surpassed the gains from depressed frequency, with companies experiencing more significant losses in PPA than they had in the decade prior. This has led to increased pressure on companies to increase rates.
Consumer advocacy groups have also become increasingly active during this time, intervening on multiple PPA rate filings while asserting that companies still owe additional refunds per the insurance commissioner bulletins. Consumer Watchdog attorney Daniel L. Steinberg has argued that certain insurance companies have created a job- and education-based discriminatory rating system that will allow “professional” groups to “benefit on the back of low-income and blue-collar Californians.” All this has led to increased scrutiny of PPA rate filings and has further complicated the market.
At the same time, many companies posted record-high combined ratios throughout 2022, even as rate increases were still not being approved. This led to increased pressure on regulators to allow for rate increases, in spite of consumer advocacy groups pushing back. Companies responded to the hardening market by tightening underwriting standards around new business, which led to more guidance from the California insurance commissioner. Bulletin 2022-10, “Changes to Premium Payment Options Without the Prior Approval of the Department of Insurance,” generally provides that any discontinuing of premium payment plans would need to be approved by the CDI prior to implementation, as these changes would likely result in a rate impact.
Other rate increase approvals continued after the one for Allstate, including for GEICO, Mercury and Interinsurance Exchange of the Automobile Club, despite consumer advocates intervening on their filings; however, as of March 9, 2023, a significant number are still pending in the PPA market. Many companies are seeking rates in excess of 6.9%, which could trigger a public hearing in the case of an intervenor — historically a threshold that most would stay below to avoid the potential of a lengthy hearing. The caveat for the hearing is that if you can reach an agreement with an intervenor, the intervenor (not the CDI) can decide not to proceed with the hearing.
Leading the way with these large requests is Root Insurance Company, with a 62.4% rate increase that is still below the minimum range allowed in its California Prior Approval Rate Template. To request a rate lower than the allowable range, Root Insurance must request Variance 5 (per CCR section 2644.27). Twenty-two other carriers have requested rate increases greater than 20%, with a smaller number requesting increases greater than 10%. These carriers altogether have latest year adjusted earned premiums (according to their filed templates) totaling more than $7 billion.
Another issue these companies are facing is how to adjust pandemic era data to achieve a reasonable indication and still fit within the CDI’s rigid templates. From the Web Access to Rate and Form Filings, carriers are roughly split between those requesting variances to adjust their data (per CDI guidelines posted June 3, 2021) and those leaving the data as is and trying to select reasonable trends within the constraints of the CDI rate templates.
Finally, it’s worth noting that the average time to approval for PPA is approximately 216 days, as of March 27, 2023. Wawanesa General Insurance Company had the shortest time to approval at a very quick 71 days — likely due to its significant deterioration of Policyholder Surplus — but the influx of rate filings since Allstate’s approval has created quite the backlog, and it is unclear how quickly the CDI will be able to process rate filings. This is somewhat exacerbated by many companies planning to file multiple rate increases one after the other in order to avoid triggering a public hearing in the case of an intervention for a rate increase in excess of 7%.
The PPA market in California is facing significant challenges and changes, with the pandemic, inflation, years of no rate increases, consumer advocacy groups and an influx of pending rate requests all contributing to a complex and shifting landscape. Pricing actuaries and other industry professionals will need to stay on top of these developments in order to successfully navigate the market and help their companies to remain competitive. Whatever strategy carriers decide to take, it is important to ensure all the CDI templates are filled out completely to support a smooth transition from intake to public notice. With new rate increases being filed regularly, you won’t want to get pushed back in the line due to minor errors in the templates.
