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No doubt you have noticed the significant reduction in traffic as a result of the COVID-19 crisis over the past few months. “Stay at Home” orders in Washington State and across the country mean millions of Americans are no longer commuting to work either because they are now working from home, or worse, they have been furloughed or lost their jobs due to the global health crisis.
With the dramatic decrease in the number of cars on the road comes also a precipitous reduction in the number of motor vehicle collisions and resulting auto insurance claims. This reduction in claims activity directly corresponds to fewer miles driven by consumers, which is a key factor in setting premium rates by insurers. The savings enjoyed by auto insurance companies through a reduction in claims paid should be passed along to consumers impacted by COVID-19.
In a letter dated March 18, 2020 to the insurance commissioners of all fifty states, the Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ) stated, “All insurers, directly or indirectly, use some measure of miles driven to determine rates, so the actions to contain COVID-19, which have radically reduced driving in America, will result in savings to the system that can be quantified and returned to American consumers.”
“The likelihood of a motor vehicle accident drops radically when the number of cars on the road drops radically,” said Robert Hunter, Director of Insurance for CFA. “Consumers who paid auto insurance premiums based on driving an estimated 1,000 miles a month but who are now driving 200 miles a month… should get relief from their auto insurers. Windfall profits for insurers and excessive insurance premiums should not be yet another blow to consumers from COIVD-19.”
Since the CFA and CEJ called for auto insurance relief for consumers in the wake of decreased driving due to COVID-19, most major insurers have responded with a wide variety of relief programs. Two insurers, Allstate and American Family Insurance, announced they would give back approximately $800 million to their customers. On April 6th Allstate said it would refund about 15% of premiums paid by its customers in April and May, totaling approximately $600 million. American Family followed suit by announcing a one-time, $50 rebate check per vehicle in each household insured with the company, totaling approximately $200 million.
But according to Dan Karr, CEO of ValChoice, a data analytics company and insurance industry watchdog, Allstate is only giving back only a fraction of its savings during the crisis. An 85% drop in the number of auto collisions is a conservative estimate according to Karr, who explained that data confirms this is the percentage of collisions that occur during periods of heavy traffic. “Data shows accident rates go up exponentially as traffic increases, and even a 5% reduction in traffic will make a difference”.
Auto insurers are likely to continue benefiting from reduced driving long after the stay-at-home orders are lifted. Many consumers will continue working from home either full or part-time. Others will be out of work because their employer closed its doors as a result of the crisis. According to the Federal Highway Commission, workers commuting in cars made up about 28% of miles driven even before COVID-19.
The CFA and CEJ have calculated the relief promised by auto insurers for March, April and May now exceeds $7 billion. But according to their findings, that is not nearly enough given the increased profits insurers are realizing by paying fewer claims.
“For those insurers providing premium relief, the relief ranges from just over 10% to 35% of two months premiums, with the vast majority of insurers providing only 15%. With some data showing motor vehicle accidents down 50% or more, more relief is needed for March, April, and May from nearly all insurers,” said Mr. Hunter. “It’s clear that premium relief of 30% or more will be needed for these months.”
“Auto insurance is regulated by the states and state laws require auto insurance rates to be cost-based and not excessive,” said Birny Birnbaum, economist and Execute Director of CEJ. “That means insurers must provide the auto premium relief because the rates based on pre-COVID-19 restrictions have become excessive.”
A joint CFA/CEJ study released on May 7, 2020 reported the typical premium relief provided by insurers to date is half what it should be based on current driving and claims statistics. The report shows ongoing premium relief will be needed for June and at least several more months as a result of fewer vehicles on the road, fewer miles driven, and fewer auto insurance claims filed. The study shows that vehicle miles traveled (VMT) declined dramatically across the nation by the third week of March, compared with the average weekly VMT in January 2020. By the week ending April 11, every state experienced a reduction in VMT of at least 52% with several states experiencing reductions of over 80%. The report finds that an average 30% relief payment is warranted for all premiums paid from the second half of March through April and May.
“Because mileage and accidents have fallen by well over 50% during the pandemic, the 15% refunds most auto insurance companies have promised are not nearly enough,” said Birnbaum.
“The data show most insurers should be doubling the relief they have promised consumers,” said Hunter. “Auto insurance rates now are, and for the next several month at least will be, excessive because of the ramifications of COVID-19. Insurance commissioners need to make sure companies reduce premiums so that the underlying rates yielding such premiums are no longer excessive,” added Birnbaum.