In mid-July, Insurance Superintendent Eric Dinallo announced that, due to New York motorists' cutback in miles driven as a result of soaring gasoline prices, GEICO had agreed to withdraw a rate hike request for most of its companies.

The superintendent said also that other auto insurers with rate filings before the department would be required to assess the impact of reduced driving on their rates and rate requests under a bulletin the department had just issued.

However, some in the industry warned regulators not to jump to any conclusions about gas prices, miles driven and insurance exposure. National Underwriter reported on Aug. 13 that the Property Casualty Insurers Association of America disputed Mr. Dinallo's determination that lower claims costs would result from fewer miles driven.

PCI's assertion flies in the face of well-established research indicating that driving behavior changes somewhat when gas prices increase, and that these behavioral changes lead to a decline in number of auto insurance claims that are filed.

Consumers respond to economic incentives and disincentives by reducing their driving as gas prices rise. As a result, auto insurance claim frequencies drop. Consequently, higher gas prices lead to lower auto insurance claim costs.

Leroy Boison, a Fellow of the Casualty Actuarial Society, studied this effect in 2005. (“Will Post-Katrina Gas Shortages Impact Auto Claim Frequencies?”–Pinnacle Actuarial Resources Inc., December 2005.)

After studying the 1979-to-1980 energy crisis, Mr. Boison found: “The crisis did not just contribute to short-term reductions in auto claims frequency; it also contributed to a long-term decline. For several years after the political crisis had passed and gasoline prices declined from their historic highs, claims frequency failed to return to pre-crisis levels.”

One of the reasons for this development, he noted, was that “…drivers found other ways to get around and stuck with them. These other factors include carpooling, public transportation and consolidating errands, which reduced drivers' exposure to the perils of the road.”

Mr. Boison concluded: “Since increases in gasoline prices contributed to a long-term decline in claims frequency as drivers opted to [spend] fewer miles on the road, it is reasonable to assume the same could have happened after this crisis if the increase in gas prices was significant and remained at a high level.” Other studies have also confirmed this effect.

Auto insurance rates are based on the trends regarding the cost and frequency of claims. The cost of claims is not affected by gas prices, except very indirectly.

However, if the cost of gasoline makes people change their driving behavior, then the frequency of accidents–and thus, claims–is directly affected.

Using the most common actuarial method, the Washington-based Consumer Federation of America found the annual rates of change in claim frequency indicated by Fast Track data through September 2007 to be as follows:

o Comprehensive: 8.2%

o Bodily Injury: 5.2%

o Property Damage: 2.4%

o Collision: 1.8%

In other words, claim frequencies were dropping by significant percentages per year nationally even before the most recent sharp increase in gasoline prices. These trend factors must be altered downward to reflect current conditions and the mounting evidence of significant changes in the driving behavior of Americans.

Federal Highway Administration data shows that passenger auto miles driven dropped by 0.7 percent from 2005 to 2006–well before the latest spike in prices.

In March, the U.S Department of Transportation reported that Americans drove 11 billion fewer miles than the same month a year ago–”a month-on-month percentage decline [which] is the largest since record-keeping began in 1942.”

It is incumbent upon each state's insurance department to test the current pricing structures in auto insurance to determine if the changes in driving behavior are at least partially to blame for the excessive profits of property-casualty insurers in recent years.

Regulators should also evaluate whether higher gas prices lead to further windfall profits for insurers, as drivers alter their driving habits to ease their financial pain.

The commissioners should consider if any cost might rise from the use of smaller, more fuel-efficient cars that produce somewhat higher claims for bodily injuries, which might slightly offset the drop in claim frequencies we will observe. However, the Insurance Research Council's claim that this effect might more than offset any savings is demonstrably false from analysis of previous gas crises.

It would be a mistake if, in performing this analysis, regulators relied only on long-term trend factors, without adjusting claim frequency expectations downward to reflect the driving behavior changes induced by the sharp gas price increases this year.