Auhtored by: Kishore Bharatula
Americans just love driving. They clocked 35,795,000,000,000 miles in 2014 and have far outstripped every other nation in driving mileage.
Opinion: American driving behavior has altered over the last decade, with per capita miles driven trending downward since 2007. Kishore Bharatula of Fractal Analytics notes that the change has resulted in a reduction in accidents and associated claim expenses, but wonders why it has not impacted insurer premiums.
Insurance companies historically have placed a great weight on mileage driven along with other rating factors based on driver and vehicle characteristics to decide on premiums. But the behavior of American drivers has been changing over the last decade, which will likely have an impact on insurance accidents, claims and premiums.
The price of gas is the single largest variable expense in driving. Crude oil prices have been trending negatively over the last few months and thus should encourage Americans to drive even more. More miles driven would mean higher risk of an accident and therefore a claim. However, from the graph below, we can clearly see that crude oil prices didn’t have a significant impact on miles driven by Americans.
A closer look at the above chart indicates two significant trends:
· Until 2007, per capita mileage has shown an increasing trend in spite of increasing crude oil prices.
· Post 2007, per capita miles traveled have been trending down even with a drop in crude prices.
A variety of factors have influenced the downward trend in mileage over the last few years.
Change in Demographics: Per capita miles consistently increased since World War II to the start of the 21st century. Baby boomers (born between 1946 and 1964) took advantage of low gas prices, improved transportation infrastructure and increased speed limits to drive a lot more. However, with most of this generation retiring, their driving habits have also come down.
The millennial generation does not share the same desire for driving, which has contributed to the decline in per capita driving. The decrease is also reflected by the drop in cars per household, which has slipped from 2.1 to 1.9 in the last decade.
Unemployment: Working members of the population drive more than nonworkers. The declining labor force—which went from 67 percent during the 1980s to about 63 percent in the last decade—has also contributed to the drop in mileage.
Increase in usage of public transportation: Americans have increasingly taken more trips via public transportation. There has been a 10 percent increase in usage of public transportation over the last 10 years along with an increase in usage of bikes and travel by foot.
People have also started living in walkable neighborhoods, thus making it easier to take a bike or reach the office by foot, further reducing their dependence of cars.
Technological Developments: Internet-enabled mobile technologies have allowed millennials to avoid regular travels to the office and conferences.
Companies have placed a lot of emphasis on work-life balance and have permitted employees to regularly work from home, use video conferencing, etc. This has led to a gradual decrease in mileage over time.
This change in driving mileage has a wide set of repercussions on auto insurance as well. When people drive less, they spend less time on the road, implying that the risk of getting into accidents is also less. As can be seen from the chart below, the number of accidents across all categories has consistently trended downward over the last few years.
Other factors, apart from mileage, have also contributed to the decrease in accidents overall. Technological developments have aided the safety of cars and drivers. A slew of inventions to prevent collisions and thefts have meant that not just the rate of accidents but also the severity of resultant claims have been consistently coming down.
All this would mean that insurance companies have been paying for fewer claims and at less cost per claim. Further, the combination of reduced traffic congestion due to fewer cars on the road and ever-improving road infrastructure has been instrumental in keeping accidents down.
What has been the implication of the behavioral changes on insurance premiums?
The change in driving mileage and reduction in accidents should mean that the average premiums paid are trending down. A look at the average premiums charged over the last few years, however, indicates the numbers have actually increased rather than decreased.
As seen from the analysis, the behavioral changes that altered driving patterns and decreased mileage seem to be long-term and to have resulted in reduced claim expenses. However, insurance companies are taking advantage of these favorable conditions and increasing their returns without passing the benefits on to customers.
There is a strong case for correction in premiums charged sooner rather than later. Drivers are keeping their fingers crossed and waiting for the burden on their pocketbooks to lessen.
Data Sources for this article include:
· The U.S. Federal Highway Administration: www.fhwa.dot.gov
· The U.S. Census Bureau: www.census.gov
· The National Highway Traffic Safety Administration: www-fars.nhtsa.dot.gov/
· The Insurance Information Institute: www.iii.org/fact-statistic/auto-insurance