California may be one of the largest auto insurance markets in the country, but a two-year freeze on auto insurance rates is a misspelling for state insurance companies and drivers. A return to pre-pandemic levels of driving increased accident severity, and more expensive claims have left auto insurance companies in California in a difficult financial position. Bankrate spoke with Vice President Denni Ritter of the American Property Casualty Association (APCIA) to learn more about the state of California’s auto insurance industry and how it affects drivers in the state.
Key learning points
- The California Department of Insurance has not approved auto insurance applications since May 2020, despite more than 75 percent of companies selling auto insurance in the state having applied for a rate increase, according to APCIA.
- Multiple insurance companies reported loss ratios of more than 100 percent in California by 2022, indicating that their claims costs exceeded their incoming premium, according to APCIA.
- Changes made by auto insurance companies in California due to their business and claims losses can make it difficult for drivers to purchase auto insurance.
When did California’s troubles start?
In March 2020, California became the first state to implement stay-at-home orders in response to the COVID-19 outbreak. It was a decision that changed driving habits in the state overnight — early studies from UC Davis found an estimated 60 percent drop in traffic volume in April 2020, resulting in a nearly 50 percent decrease in the number traffic accidents.
Because of this reduction in driving, the California Department of Insurance directed auto insurance companies to provide premium refunds to drivers. Overall, auto insurance companies have returned about $2.4 billion in premium refunds to drivers in California.
Pandemic response: California stops filing of rate applications
At the start of the pandemic, many insurers also withheld or withdrew rate returns submitted to the state’s Department of Insurance for approval. As the pandemic evolved and states reopened, the drivers hit the road again. Federal Highway Administration statistics showed that the mileage driven in 2021 and 2022 was close to or exceeded the mileage driven in 2019 and 2020.
However, the ministry maintains its position. In a statement provided to S&P Global in November 2021, the Department of Insurance indicated that the pandemic was still ongoing and driving was still declining.
“People returned to pre-pandemic driving levels,” says Ritter, “and some people developed bad driving habits, such as speeding, not wearing seatbelts, and drunk driving.” Bad driving habits across the country are often cited as a reason for rising auto insurance rates, and that certainly applies to the Golden State. In California specifically, a study by the National Highway and Traffic Safety Association saw a 10.7 percent increase in traffic deaths in 2021 compared to 2020. The agency reported that 4,258 people died in vehicle accidents in the state in 2021, compared to 3,847 people in 2020 .
The APCIA also found that physical damage auto claims fell 30 percent in 2020, but increased 60 percent in 2021. More accidents mean more claims, which are also now more expensive due to the effect of the pandemic on supply chain issues and historic inflation. And longer repair time also means more expensive rental car costs while the vehicle is in store – Hopper found that car rental rates were up 95 percent in May 2021 compared to the start of the year. Daily rates in Los Angeles were about $94 per day.
What are auto insurance companies in California doing now?
Auto insurance companies in California have begun to share the challenges of operating in the state. In recent earnings calls, several major insurers such as Allstate, Geico, Kemper and Liberty Mutual reported loss ratios in excess of 100 percent in California. This means they paid out more claims than they received in premiums, and without rate adjustments it is difficult for auto insurers to resolve the imbalance.
Typically, auto insurance companies can balance their risk exposure, continue to pay claims, and avoid insolvency by being stricter about what new business they take on or requesting rate increases. But these options are currently not available in California.
This is due to a measure that was adopted in 1988. “Proposition 103 turned California into a state where everyone can come,” explains Ritter. “This means that if you are a good driver in the state and you apply for insurance, an insurer should provide you with coverage.” This is even if an insurance company takes losses and continues to pay out more claims.
Tricia Griffith, CEO of Progressive, said on the company’s November 2021 third-quarter earnings call:
California’s moratorium on rate increases is unfortunate because we don’t think it serves California consumers, and you only have a few things to do.
— Tricia GriffithCEO of Progressive
She continued, “There are a few levers that we talked about, and we’ll use those tactics to slow growth, but we want to be a part of the future California market and we’ll do what we can to get there.”
For Progressive, this meant limiting ads in the state. Other carriers, such as Allstate, tried to limit payment plans or banned independent agents from selling their personal line products. In fact, Geico has closed all physical storefronts in California and customers can no longer call for a quote. Instead, potential customers need to start a car insurance quote online.
What does this mean for drivers in California?
While it may seem like a blessing for drivers in California not to face fare increases, the situation has negative consequences. The ongoing situation could make it harder than ever for California drivers to buy auto insurance and see what options are available to them. And the best auto insurance companies in California can be limited in where they can provide coverage to drivers.
This may be especially true for those who do not have access to the internet to buy policies online and have more complicated needs that require a local insurance agent. Additionally, as one of the most diverse states in the nation, nearly 44 percent of Californians speak a language other than English, while 17.4 percent lack a strong command of English. These drivers may have the most difficulty navigating a phone or online process when buying auto insurance or handling auto insurance claims, especially if translation services are not offered or easily accessible.
According to Joseph Lacher, CEO of Kemper Insurance Company, in the company’s auto insurance report:
What we’re seeing more and more is carriers, ourselves included, becoming less and less willing to write new business, being more restrictive from an underwriting perspective, and tightening up everything they can.
—Joseph LacherCEO of Kemper Insurance Company
it comes down to
What happens in California is different than elsewhere in the country. “The unprecedented losses in the auto insurance market, coupled with the lack of rate cuts on the horizon, have led California insurers to take the unusual step of limiting their exposure to new business,” said Ritter. “This highly competitive industry is no longer competing for new customers in the country’s largest market.”
Nearly two years after California first implemented on-site measures to prevent the spread of COVID-19, the state’s landscape has changed for auto insurance companies. California drivers may soon face a no-win scenario: either rates must rise to ensure the financial health of companies, or companies will continue to move out of the state, leaving drivers with little choice for coverage.