PCI: Del. Auto Insurance Profitability Stuck in Reverse

April 5, 2005

Even after investment income is considered, underwriting private passenger automobile insurance in Delaware has been unprofitable for the past five years, according to a study done by the Property Casualty Insurers Association of America.

The primary reason for these poor financial results – and for consumers paying among the highest average auto insurance premiums in the nation – is that the average cost of bodily injury and personal injury protection (PIP) claims in Delaware is reportedly more than 50 percent higher than the average cost of such claims in neighboring states.

These consistently high claims costs, combined with a burdensome regulatory environment that restricts insurers’ ability to adjust prices or consider effective factors to underwrite and rate policies, are forcing many insurers to think twice before doing business in Delaware or expanding their operations in the state. This, in turn, reduces competition and consumer choice in the marketplace.

“Clearly, the Delaware auto insurance market is not attractive to insurers right now,” said Richard Stokes, regional manager of the Property Casualty Insurers Association of America (PCI), a trade group of insurance companies that underwrite nearly 40 percent of the nation’s auto insurance policies. “But the state legislature can create a more competitive market place by enacting laws that allow insurers more flexibility to price their products. Lawmakers can also play an important role by rejecting efforts to unfairly restrict insurers from using proven effective underwriting factors, such as credit history, to offer lower auto insurance rates to the majority of their customers. New Jersey enacted similar legislation in 2003 and that state has seen an influx of new companies in the market offering consumers a wider variety of products at a lower cost.”

The PCI study found that insurers paid out $105.30 in claims for every $100 of premiums in 2003, significantly higher than in Pennsylvania, Maryland and Virginia. These losses are occurring even though Delaware’s average statewide auto premium is higher than in any of the neighboring states — $907, compared with $625 in Virginia and $837 in Maryland. Moreover, Delaware has from 100 to 200 fewer auto insurance writers than neighboring states like Maryland, Virginia and Pennsylvania. In 2003, the state had 278 insurers compared with 381 in Maryland, 470 in Pennsylvania and 413 in Virginia.

When considering pre-tax operating profit, in which investment income is added to underwriting results, insurers turned a profit in Maryland and Virginia, but lost money in Delaware, according to the PCI study. And Delaware’s comparatively small size is reportedly not a factor in the profitability issue.

PCI compared the number of insurers writing in the 15 states with under $1 million in private passenger auto premium. Although Delaware has the sixth most writers, it trails behind Nebraska, Idaho, New Mexico and Montana – none of which have any major metropolitan areas.

In 2002, the average auto insurance premium in Delaware was the ninth most expensive of any state according to the National Association of Insurance Commissioners (NAIC). But the steady decline of insurers writing auto coverage could change that, Stokes warned. “Insurers facing ongoing losses of this magnitude will carefully consider whether they can afford to stay in Delaware,” he said. “And losing insurers will eventually hurt consumers with higher premiums and lack of coverage.”