The year 2022 rocked the auto insurance industry’s boat, leaving all aboard concerned with what’s to come.

By Henry Kowal 

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In addition to inflation, which hit a 40-year high in the U.S. in 2022, auto insurers are also struggling to handle the rising frequency and severity of claims. (NATHAPHAT NAMPIX/Adobe Stock)

Based on industry and driving behavior trends, it’s clear that auto insurance leaders — along with many other industry “captains” — are faced with rough waters as we kick off 2023.

To help navigate, here are three predictions to anticipate along with three ways leaders can choose to respond.

Auto insurance predictions for 2023

Auto insurance rates will continue to rise.

Right now, we’re operating in an environment where many uncontrollable, outside factors are impacting business success. In addition to inflation, which hit a 40-year high in the U.S. last year, auto insurers are also struggling to handle the rising frequency and severity of claims.

With people driving more than they were in 2020 and 2021, we’re seeing an increase in risky driving behaviors. And according to a recent report , claims costs have been outpacing auto insurance rate increases.

So, in an attempt to stay afloat in this less-than-ideal environment, auto insurers will likely rely heavily on factors that they can control this year, which includes their rates.

Auto insurers will look for ways to minimize costs.

Similarly, we believe auto insurers will look for ways to minimize their costs as another tactic to take control and improve their profitability. Last year, in response to a dramatic spike in operating costs, we saw major insurers slash their advertising budgets.

Because of this, auto insurers will likely continue to be extra cautious with their budgets in 2023. However, it’s unknown if that will materialize through simply cutting costs or through cost optimization.

Consumer shopping will continue to rise.

Just like businesses, consumers are struggling with rising costs and, as a result, looking for ways to take control and improve their own financial situation.

As they search for ways to minimize expenses, auto insurers are in danger of losing customers to competitors with better prices. In fact, a May 2022 survey found that 39% of auto insurance customers had shopped for a new carrier since the beginning of the year and 21% of those actually switched.

Out of those consumers who aren’t currently switching, many are embracing telematics to gain control over their pricing. Or at least, to secure fair and transparent pricing. The same survey found that the number of auto insurance customers who opted into a telematics program rose from 49% to 65% from January to May 2022. And the average pricing satisfaction among those participating in a telematics program is about 59 points higher  than customers overall.

Based on these insights, it’s clear that telematics can be a strategic solution to win new customer business while also retaining customers for auto insurers concerned with losing their policyholders.

Three ways to take on 2023

As we dive into 2023, auto insurance leaders are tasked with choosing how to respond to the challenges that are following us into the new year, and that’s not an easy job.

Here are three ways to respond to either sink, swim or soar:

Do nothing and sink.

While the easiest response is no response at all, it’s likely the worst possible way to take on the new year.

The rate of inflation coupled with the rise in claims costs is making it difficult for auto insurers to remain competitive. We’ve already seen a shift in the list of largest auto insurance companies this year, so how these businesses choose to respond to these challenges next year will be critical.

Counteract and swim.

Another way to respond is to counteract the challenges, and that’s what we’ve seen a lot of companies turn to. Businesses across industries have announced major layoffs and budget cuts as a way to counteract the negative financial impact they’re experiencing with inflation. For insurers specifically, we’ve seen rates rise.

While those difficult decisions may be necessary for companies to stay afloat in the short-term, the reality is raising rates can only go so far before customers start to shop around for better options. This is especially true for the safer, lower-risk drivers that provide the greatest lifetime value to insurers.

Innovate and soar.

My top recommendation is to invest in innovation to push ahead of the competition. Rather than relying on cutting costs, businesses should look for ways to optimize their costs and grow profitably for a higher ROI.

This year’s success story is Progressive moving into the top slot as the largest U.S. auto insurer. Berkshire Hathaway’s Vice Chairman of Insurance Operations, Ajit Jain, attributed a part of Progressive’s success  to innovation with its relatively early adoption of telematics.

This year, auto insurers should invest their budgets into innovative telematics data solutions. This includes using telematics insights at point of sale to improve profitability by better matching rate to risk, retaining more customers with better pricing for safer drivers, and maximizing marketing dollars with more efficient targeting to increase quote to bind ratios. Rather than just “staying afloat,” or barely making it through these tough times, investing in innovation will set companies up for long-term success.

Henry Kowal is a product director at Arity.

Henry Kowal is a product director at Arity. He is responsible for emerging aspects of Arity’s Insurance product strategy, including Arity IQ. These opinions are his own.

Kowal joined from The Hartford, where he defined the telematics strategy and roadmap for the Personal Lines Auto business. He also oversaw the design, implementation, and management of the new smartphone telematics program offered to The Hartford’s AARP policyholders in more than 40 states.

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