Q: Why are auto insurance rates going up?

A: Auto insurance rates are determined largely by the claims costs paid by insurance companies. These claims costs are determined by the cost of paying for the bodily injuries and property damage caused by auto accidents, and the costs incurred in defending any liability lawsuits which might be initiated against policyholders.

Claims costs comprise the vast majority of auto premium dollars, and those costs are increasing steadily. In 1988, 82 cents out of every auto insurance premium dollar went to pay claims.

For private passenger auto liability, the figure was 92 cents.

The chart shown below, “Primary Sources of the Claims Cost Surge,” shows the elements that are causing increased claims costs-costs that are ultimately passed on to consumers through increased premiums.

Q: How rapidly are these claims costs increasing?

A: Claims cost increases have exceeded premium increases in recent years. Over the 1979-1988 period, auto liability premiums rose by 136 percent. But during those years claims costs and legal expenses jumped 83 percent, or 35 percent faster.

Since 1983, the average amount paid per claim has risen sharply: 45 percent for property damage, and more than 40 percent for bodily injury liability.

In 1988 total paid claims costs were growing fastest for bodily injury liability. Bodily injury claim frequency increased 5 percent in 1988. During the same year, bodily injury paid claims costs rose by 14 percent.

The cost of settling claims written under comprehensive coverage policies (the portion of your auto insurance policy which covers losses resulting from fire, theft, or windstorm) is rising significantly- nearly 9 percent in 1988, compared to an average growth rate of 3 percent over the prior two years.

Q: What about the cost of medical care?

A: Medical care costs have sky- rocketed in recent years, adding significantly to auto insurance claims costs.

Between 1967 and 1982, the Consumer Price Index (CPI), which measures inflation in all consumer goods and services, rose 192 percent-but the CPI measure of medical expenses rose 244 percent, and the cost of hospital care rose 488 percent.

Between 1980 and 1986, the average cost of hospital care rose 80 percent, or 2.5 times the CPI for the same period-and hospital costs increased another 16 percent between 1986 and 1987.

Overall health care expenses rose 10 percent last year, double the general rate of inflation.

Q: Have cars become more expensive to repair?

A: Yes, definitely. Changes in the manufacturing of cars has led to increased vehicle safety, but also to increased repair costs-costs which impact significantly on auto insurance claims costs. Unibody cars and high-tech components have significantly increased both the cost of the vehicle and repair costs. Average claim payments for property damage arising from accidents have been increasing at more than 9 percent a year since 1986, a rate well in excess of auto repair inflation rates.

Cars continue to become more expensive to buy and to repair. The average new car in 1987 cost $13,581; the price for a comparable 1967 car, adjusted for inflation and added safety and pollution emissions equipment, was estimated by the Department of Transportation at $9,639. A study by the Alliance of American Insurers indicates that it would cost $60,755 to buy all the parts necessary to rebuild a 1989 Nissan Maxima which had a showroom sticker price of $17,500. Labor costs would be additional.

Q: Why are auto insurance rates going up?

A: Auto insurance rates are determined largely by the claims costs paid by insurance companies. These claims costs are determined by the cost of paying for the bodily injuries and property damage caused by auto accidents, and the costs incurred in defending any liability lawsuits which might be initiated against policyholders.

Q: Does attorney involvement add to claims costs?

A: As average compensation levels for auto accidents have surged upward, auto accident litigation has drawn increased activity and interest from plaintiffs’ lawyers-significantly ad- ding to auto insurance claims costs and, in some cases, actually limiting the net settlement to the injured party. A study conducted by the All-Industry Research Advisory Council (AIRAC) found that lawyers now handle 45 percent of all auto injury claims, up from 31 percent in 1977, and showed a direct relation- ship between increased attorney involvement and increased auto insurance costs.

Legal expenses associated with claims settlements have been rising even faster than the claims costs themselves. In 1988, while claims costs rose by 9 percent, legal expenses rose by 15 percent.

Claimants were paid more promptly when attorneys were not involved, according to the AIRAC study.

In many cases, the claimant’s net settlement was less when an attorney was involved.

Q: Aren’t insurance companies making a bundle on auto insurance?

A: No. Despite statements to the contrary, underwriting private passenger automobile insurance is extremely unprofitable, according to objective industry statistics. As a “stand-alone” industry, private passenger auto would probably be the nation’s least profitable industry.

Even after factoring in investment income and capital gains, the 1988 after-tax return on equity (ROE) for underwriting private passenger auto was less than 1 percent.

In 1988, the property and casualty insurance industry’s total profitability was substantially below the average for corporate America. The insurance industry’s 1988 return on equity was 12 percent, compared with projected estimates of 16 percent for the Standard & Poor’s 500. The insurance industry has been less profitable than its peers on an after-tax basis over the 1978-87 decade.

Company operating expenses account for only 21 percent of auto insurance premium dollars.

Other industries have much higher expense ratios: for example, banks, 27 percent; retail department stores, 35 percent.

Q: How much do theft and fraud affect auto insurance costs?

A: The increasing problems of auto insurance theft and fraudulent insurance claims add significantly to the cost of insurance for all consumers.

In 1987, 1.3 million vehicles were stolen in this country- an automobile theft every 30 seconds of every day of the year.

The motor vehicle theft rate has been increasing at the rate of 5.3 percent per year-at a time when the overall crime rate rose only 2.2 percent. Since 1983, the number of motor vehicle thefts has risen 28 percent more than twice the rate of growth of all thefts and more than 12 times the rate of growth for robberies.

Fraudulent activities account for 15 to 20 percent of all auto insurance payments, or approximately $1 billion annually on a nationwide basis.