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Letter to the Editor

A.M. Best Report Shows the Nonstandard Auto Market Still Growing

OLDWICK, N.J. -- The nonstandard automobile insurance segment has enjoyed above-average growth and profitability for much of the past decade, according to a two-page report released this week by A.M. Best Co. The abundance of new capital, combined with aggressive growth strategies by market leaders, fueled very soft pricing during 1998 and 1999. The outcome has been disappointing underwriting results for many insurance groups, as increases in loss costs have far outpaced premiums.

The top five insurance groups command more than 60 percent of the nonstandard auto segment's premiums. This concentration of power has put less efficient, second-tier companies under increasing financial pressure as they compete for less available market share.

The nonstandard-auto segment is prone to pricing cycles, led by market leaders whose rate changes can dictate overall market actions. As loss costs increased rapidly and unexpectedly with regard to personal injury protection coverage in certain large states, several companies began to report significant deterioration in underwriting results beginning in late 1999 and continuing into 2000.

A.M. Best expects the nonstandard auto market to contract considerably over the next five years. The segment is expected to record a combined ratio of roughly 110 for the full year 2000--higher for market followers--led by rising medical inflation against the backdrop of prior rate decreases. Based on aggressive rate increases filed by several market leaders during 2000, results are expected to improve during 2001, although the market will be challenged still by rising loss costs. Beyond 2001, A.M. Best expects modest growth in premium volume due to an absence of new compulsory auto insurance legislation, a slowing in the depopulation of involuntary state pools and an abundance of capital.

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