Highway Robbery: The High Cost of Automobile Insurance in New York
The High Cost of Automobile
Insurance in New York
The Office of the New York City Comptroller just released a report disclosing the disproportionately high profits as well as high premiums for auto insurance in New York.
Here’s an overview from the report:
Since 2001, New York’s status as one of the most expensive states to insure an automobile has been reinforced by statewide premium increases that were substantially greater than the inflation rate and exceeded 40 percent in much of New York City for some major insurers.(link to full report)
An analysis of automobile insurance industry financial data by the Office of the New York City Comptroller determined that these increases were excessive relative to national averages and in relation to other states and led to unprecedented auto insurer profitability within New York State. Overall premiums should be reduced by at least 15 percent on average—at least $1.5 billion statewide—to bring rates back to historical balance.
Key findings on automobile insurer profitability:
• From 2000 to 2005, automobile insurance premiums in New York increased nearly 29 percent, to $10.5 billion. At the same time, losses (claims payouts) decreased more than 20 percent, to $5.1 billion. Chart 1 illustrates this divergence.
In contrast, premiums increased 33.8 percent nationally, moderately faster than New York, yet losses nationally actually increased 12.9 percent. Looking further back, from 1990 to 2005, premiums increased nationally at a rate 1.6 times as fast as losses. In New York during this period, premiums increased at a rate 4.6 times as fast as losses. Nationally, the property and casualty insurance industry, which includes automobile insurers, is expected to report record net income of $60 billion in 2006, up from a near record $43 billion in 2005; New York drivers are contributing disproportionately to
• The amount by which premiums exceeded losses in New York reached $5.4 billion in both 2004 and 2005, by far the largest such gap since at least 1990. From 1990 to 2002, the amount by which premiums exceeded losses ranged only from approximately $1.4 billion to $3.2 billion.
Rising premiums and decreasing losses led the private passenger automobile insurance loss ratio—the portion of each premium dollar that goes to pay claims—to plummet to an extraordinarily low 50 percent in 2000 and, notwithstanding small premium reductions, to only 48.4 percent in 2005. These were the lowest loss ratios in the nation. In fact, only seven times between 1990 and 2004 was the loss ratio less than 50 percent in any state. Historically, automobile insurer loss ratios have ranged between 60 percent and 75 percent.
• Return on net worth was an extraordinary 18.6 percent in 2004. Return on net worth is the main indicator of insurer profitability reported by the National Association of Insurance Commissioners (NAIC). In 2004 (the latest year available), return on net worth for private passenger automobile insurance was 18.6 percent, the highest New York return since at least 1990 and well above the 13.2 percent nationwide return. In fact, the New York return in 2004 substantially exceeded the nationwide return in any year between 1990 and 2004.
Underwriting profit in 2004 also was unusually high. Underwriting profit (or loss) is the amount left after losses, expenses and dividends are subtracted from premiums.
Typically, automobile insurers have an underwriting loss but still realize a profit due to investment income. Yet the underwriting profit for private passenger automobile insurance in New York during 2004 was 13.2 percent of earned premiums, double the highest previous New York underwriting profit and more than double the highest national underwriting profit in the 1990-2004 period.
• A $1.5 billion annual reduction in premiums would restore to historical levels the gap between premiums and losses. This figure takes into account any conceivable increase in losses and inflation, and the phase-in of rate reductions approved by the Insurance Department in 2005 and the first half of 2006.
To read a letter from the Comptroller to Governor Elect Spitzer, click here.