Policymakers in many states – notably including California, Michigan and Louisiana in recent weeks – are considering aggressive steps to drive down auto insurance premiums in the wake of the Covid-19 pandemic and changes in driving behavior. Even as they contemplate this, many leading carriers have already taken temporary action to reduce rates during the pandemic – both because it was the right thing to do and to forestall damaging policy changes.
- The pressure to offer mileage-based insurance will increase – at least until there is clarity about driving patterns in the post-Covid economy. But this may accelerate an adverse selection problem – with low mileage drivers switching from conventional to mileage-based coverage, and high mileage drivers sticking to conventional coverage with unreasonably low estimated miles. Carriers need to monitor vehicle use in both cases – or will get burned.
- Policymakers should tread lightly for a few more months, at least. If mileage increases significantly, a forced premium reduction could induce market failures. If mileage falls, competition will soon drive down rates or risk intervention. But if traffic gridlock happens, we will likely see a drop in claims severity in the near-term and an acceleration toward alternative work and commute patterns in the mid-term. But none of this is clear today.
- Carriers should use this period to look for ways to increase customer retention by focusing on improving the customer experience across channels and striving to reduce rates by eliminating fraud, manual work and transaction costs.