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INFLATION: The Latest Casualty

4 minute read

One severe difficulty facing any program to bring inflation under control is the problem of momentum: last year’s price increases tend to push up other prices today, regardless of what the general economy is doing. A prize example is auto insurance. Soaring auto-repair bills and medical costs during the last two years are causing auto insurers to raise premium rates to motorists—fast enough to help push up overall living costs more rapidly than some economists had expected.

During 1975, auto-insurance premiums rose an average 20.7%, and some big further increases are coming. Allstate early in December announced that it would seek increases averaging 12.5%; New Jersey has approved an 18.3% increase in auto-insurance premiums. In November the consumer price index rose at an annual rate of 8.7%, no better than the bad October figure, though many economists had expected a drop. One reason the rate stayed high: larger-than-expected boosts in auto-insurance premiums.

The increases, though, are scarcely making the insurers rich. Indeed, during the first nine months of 1975, State Farm suffered an underwriting loss of $100 million, and Allstate a property and liability deficit of $215.4 million. (An underwriting loss is an excess of claims paid over receipts from policy premiums and reserves set aside to handle those claims. An insurance company’s overall profit or loss is also determined by other factors, such as how well its investments fare.) Those losses contributed to a record underwriting deficit of $4 billion expected for all property and liability insurers in 1975; underwriting losses forced at least 26 of the smaller companies out of business.

No one was more surprised by the underwriting debacle than the companies themselves. Their reserves, which determine how much new business they can write, were swollen as the companies entered the 1970s. But when the stock market began plunging early in 1973, the companies saw their portfolios wither and their reserves drop 22%, to $21 billion by the end of 1974. At about the same time, inflation was racing ahead to record levels, sending claims costs soaring, a condition that was worsened by an unusually high number of tornado and fire losses in 1973 and 1974.

Auto insurers got some relief in 1974 because the gasoline shortage cut driving and caused a 7.4% reduction in auto accidents. As the shortage abated in 1975, however, the accident rate rebounded, and the higher costs of repairing cars pushed up underwriting losses. In addition, other property and liability insurers may have to settle an estimated record 1 million suits—twice as many as were filed five years ago—against companies that turn out allegedly faulty products. And though American workers were involved in 200,000 fewer on-the-job accidents in 1974 than in 1973, increased medical costs raised the insurers’ bill for covering the 2.3 million accidents that did occur to $13.6 billion, a rise of $800 million over 1973.

As the industry sees it, premiums have not kept up with the inflation in costs. Even so, the way premium rates are set is coming under attack from officials in Washington, who apparently believe that the rates are too high. The Ford Administration will soon ask Congress to repeal the McCarran-Ferguson Act. Since 1945 this act has permitted the states to regulate insurance companies, effectively exempting them from key aspects of federal antitrust laws.

Rating Bureaus. The prime targets of the Administration are property and liability insurers. These companies jointly organize rating bureaus, which in each state compile statistical information that enables insurers to determine average risks and costs. In many states the rating bureaus also add a profit markup and file a schedule of premium rates that state authorities generally accept. The Administration believes this practice makes rates higher than they would be if each company filed its own premium schedules, and it thinks the practice would be illegal under federal antitrust laws.

The proposed legislation would also prevent states from setting minimum premium rates. This might encourage property and liability insurers to experiment with “mass-merchandising” techniques—selling policies by mail, for example, with no agents involved—and also with writing group policies, as life and health insurers commonly do. At present, property and liability insurers have no incentive to try these strategies; they are in effect forbidden by some state authorities to pass to consumers the savings in costs that might result.

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