By ANUPREETA DAS And LESLIE SCISM | WSJ
A sudden rise in traffic deaths surprised big car insurers in the first half of 2015, meaning higher premiums for drivers who are now traveling in record numbers.
Industry executives say the 14% surge in fatal accidents tracked by the nonprofit National Safety Council was due to a combination of factors: the lowest gas prices in years, adverse weather in some parts of the country, and an economic recovery in the U.S. that means drivers are simply driving more.
The upsurge after years of declines was an unexpected development for two of the three largest car insurers, Geico and Allstate. Both are raising premiums to offset the expenses associated with the new accident claims. Allstate this year has gotten approval from dozens of states to boost rates by an average of 3.9% for its main product, according to financial filings. Berkshire Hathaway Inc. said in its second-quarter earnings report that its Geico is implementing premium rate increases “as needed” to offset jumps in the frequency and severity of customer claims.
Analysts say drivers could be facing a prolonged period of rising premiums. In an Aug. 26 report, Nomura stock analyst Clifford Gallant noted that while some insurers “are already reacting aggressively with rate increases, we expect that multiple rounds may be necessary just to catch current trend.”
The jump in claims contributed to declines in second-quarter profits for Geico, owned byWarren Buffett’s Berkshire Hathaway, and Allstate. Mr. Gallant said he expects underwriting profits at both companies to “remain under pressure through 2016.”
“More miles driven, more cars on the road, more accidents,” said Allstate Chief Executive Tom Wilson in an interview.
Fatal crashes had been falling in the past decade because of more-frequent use of seat belts, tougher enforcement of drunken-driving laws and a proliferation of newer, safer cars with stability-control systems and air bags. Some of those trends contributed to a decline in car-insurance costs for consumers—the average annual expenditure for auto insurance in the U.S. crept down from $1,076 in 2003 to $846 in 2011, according to inflation-adjusted data from the National Association of Insurance Commissioners.
The average expenditure has edged up 2% since then to an estimated $867 last year, according to trade group Insurance Information Institute. The increase is in part because Americans have gotten comfortable buying new cars again, and those cars are more expensive—and more costly to insure—than the ones they replaced.
Roads turned more dangerous this year as travel increased 3.5% to a record 1.54 trillion miles through June, according to the Federal Highway Administration. Although population growth contributes to increased mileage, the number of miles Americans drove in recent years barely budged from a peak in 2007. That’s despite the population growing by 6.6% during the same period, according to a study by the Insurance Information Institute.
Meanwhile, gas prices plunged to their lowest level since 2010, according to figures from the American Automobile Association. In addition, the unemployment rate has fallen to 5.1%, meaning more people are using their cars to get to work.
“It’s kind of a perfect storm,” said NSC President Deborah Hersman.
Motor-vehicle deaths are now expected to exceed 40,000 for the first time since 2007, according to NSC.
The Allstate CEO said it is typical for people to drive more and have more accidents as the economy rebounds from a recession. But what surprised industry executives is how long it took this time around. A slow job market and stagnant wage growth held down driving for years following the 2008 financial crisis. Consumers didn’t return to the roads in heavy numbers until this year.
There is some disagreement within the industry about whether increased mileage is chiefly responsible for the jump in vehicle-related deaths, which include driver, passenger and pedestrian deaths resulting from car, truck and motorcycle crashes.
Distracted driving, especially the use of smartphones to talk, text or even watch videos while on the road, could be an overlooked contributor, said Warren Buffett, Berkshire Hathaway’s chief executive. One in four car crashes involves cellphone use, according to NSC estimates, even though most states have laws banning text-messaging and hand-held cellphone use while driving.
“If cars are better—and they clearly are—drivers must be worse (adjusted for mileage),” Mr. Buffett said in an email. Given that mileage is up only around 3%, Mr. Buffett said he found it hard to draw any other inference from the data than distracted driving to explain the much larger jump in fatalities this year.
The number, cost and severity of customer claims are all up this year at Geico. Weak second-quarter results contributed to a 37% drop in net profit at Berkshire.
Allstate President Matt Winter told analysts on an August conference call that “increasing vehicle complexity” contributed to the company’s 47% decline in second-quarter net income.