The outlook for the US motor insurance market in 2025 suggests rate deceleration in Personal Auto due to increased competition, alongside sustained social inflation challenges for Commercial Auto, according to Craig Nelson, Senior Treaty Underwriter & Manager, CUO P&C Reinsurance at Swiss Re.

In a recent report, Nelson noted that after years of suboptimal results, the Personal Auto segment rebounded in 2024, driven by a decrease in claims severity and rate increases aimed at offsetting hikes in repair costs and vehicle prices. The industry combined ratio for US Personal Auto dropped to 97%, 15 points below an all-time high of 112% just two years earlier.

However, Commercial Auto continues to struggle with litigation, rising claims costs, and reserving uncertainty, posting a combined ratio of 108% in 2024 despite a 10% increase in premiums.

Nelson highlighted that economic, social, and medical inflation are contributing to losses in US auto insurance.

In 2021 and 2022, used car prices—an indicator of attritional claims inflation—rose sharply.

While CPI inflation has moderated since the peaks of 2021 and 2022, repair costs remain high due to labor shortages, supply chain disruptions, and advanced vehicle technology.

“Social inflation has also contributed to increased loss severity, fed by negative attitudes towards large corporations and the increase in attorney involvement. High profile litigation in the trucking industry has led the way yet commercial auto operators such as ride sharing companies and personal auto lines are also impacted,” said Nelson.

Additionally, the cost of treating bodily injury claims has been further exacerbated by medical inflation. According to KFF’s analysis of Bureau of Labor data, medical care costs have increased by 121.3% since 2000, far outpacing the 86.1% increase in consumer goods and services during the same period. With rising drug prices, the adoption of advanced medical equipment, administrative overheads, and higher labor costs, medical inflation is unlikely to ease anytime soon.

Nelson also noted that sales of Electric Vehicles (EV) in the US are expected to grow, posing challenges for insurers, as the average repair cost for EVs is approximately 29% higher.

Autonomous vehicles are also expected to impact the market by potentially reducing human error, which causes 90% of traffic incidents.

Claims severity related to motor vehicle traffic accidents remains a challenge. Bodily injury claims have risen 20%, largely due to social inflation, while material damage severity increased by 47% in 2023.

The report also pointed out that elevated tariffs on auto parts imported from mainland China in 2018 have contributed to higher claims costs. The new round of tariffs on China, Canada and Mexico could cause supply chain challenges and delays, driving up claims severity and the cost of replacement parts like windshields and airbags.

Furthermore, the increasing frequency and severity of extreme weather events are affecting the US auto insurance segment. For example, Carfax estimated that 138,000 vehicles across six states sustained flood damage from Hurricane Helene.

“Regulation plays an important role in shaping the US auto insurance market, influencing pricing, coverage options and consumer protection. In Florida, tort reforms have resulted in a reduction in litigation related to auto glass repairs and eliminated one-way attorney fees. This has helped ease pressure on auto rates; however, at this writing lawmakers are considering several bills that could roll back some of the reforms in Florida’s Property and Auto markets,” said Nelson.