Climate change increases the severity of vehicle damage claims
Data shows how the increased frequency of severe weather events has impacted auto damage losses.
We haven’t reached the end of 2019, and the United States has already experienced several severe weather events, including a polar vortex and many hailstorms in the Midwest, massive flooding in the Northern Plains, and heavy El Niño rains in California.
Weather plays a critical role in claims impact — both the frequency and severity of auto physical damage claims, and it is common to observe seasonal changes in industry data.
The percentage of non-drivable repairable vehicles typically spike during months with colder temperatures and higher levels of precipitation (Figure 1). The percentage of total losses also increases accordingly with non-drivable repairable vehicles (Figure 2).
Lower frequency, higher severity affect climate change losses
In late 2018, three of the largest auto insurers in the U.S. reported decreased frequency and increased severity in third-quarter auto claims. Allstate’s gross auto property damage frequency dropped 2.7 %, and severity spiked 7.7%. Geico’s auto claims fell two to three percent, and collision severity rose four to six percent when compared to 2017.
Collision claims frequency has the potential to decline even further with the widespread adoption of advanced driver-assistance systems (ADAS) in modern cars. The Insurance Institute for Highway Safety (IIHS) estimates as many as 1.9 million total crashes could be prevented or mitigated each year if forward-collision systems were standard on all vehicles. However, the average collision repair cost is expected to continue to rise based on increasing vehicle complexity and the projected growth in special materials.
Last year, 2018, delivered greater-than-average precipitation compared with the prior 15 years (Figure 3) based on the highest percentage (25.9%) of days with rainfall. The fourth quarter of 2018 saw particularly high levels of rainfall, especially along the Atlantic Coast and parts of the Midwest.
The impact of heavy rains is illustrated by the difference in the percentage increase experienced between Q3 2018 and Q4 2018 based on states that recorded average, above average, and well above average (including record) levels of rainfall during Q4 2018 (Figure 4). States with well above average levels of precipitation saw a 7% increase in average repairable severity, while states with above-average and average levels saw 6.22% and 5.19% increases, respectively.
More flooding likely
The increased frequency of increasingly severe weather-related events means significant flooding is expected to continue to be a major issue for insurers. Claims operations will need innovative technology for advanced warning of such events and operational flexibility to scale up quickly to meet demand spikes. Management of these often catastrophic incidents will soon become a business-as-usual activity for claims managers.
Coastal communities across the U.S. again experienced increased high tide flooding last year, forcing their residents to deal with flooded shorelines, streets, and basements. The elevated water levels affected coastal economies, tourism, and infrastructure, like septic systems and stormwater systems, according to a new report from the National Oceanic and Atmospheric Administration (NOAA). But overlooked in this report is the effect on auto losses. The report warns that annual flood records are expected to be broken again next year and for years and decades to come from rising sea levels.
Stopping short of employing full-time meteorologists, auto insurance carriers must still be cognizant of weather patterns and forecasts outside of potential CAT events to appropriately set reserves and staffing levels. It is reasonable to expect increased claims volumes and higher average severity in areas where precipitation levels are higher than average.
Forward-thinking insurance carriers may choose to provide updates (either through regular communications or targeted alerts) to their customers that inform them of the potential risks of driving during periods of inclement weather to help bring awareness to driver safety, and thus, potentially reduce overall claims exposure and increasing claims severity.
Ryan Mandell is the director of claims performance for Mitchell’s Auto Physical Damage (APD) division, where he works hand-in-hand with insurance executives and material damage leaders to provide actionable insights and consultative direction for their claim’s organizations. Opinions expressed here are the author’s own.
This piece originally appeared on Mitchell’s blog and is republished here with consent.
Related: