How Recession Is Affecting the Car Insurance Industry in the US

As all of us know, recession has already hit hard on most of us and has also resulted in quite a few major layoffs all across the nation. This condition has not only led to more unemployment, lack of money and depression; but it also has put more and more uninsured drivers on the streets.

According to the National Bureau of Economic Research, this recession that began in December 2007 is likely to continue for some time to come. The effects are already transparent and have boiled down to the lowest levels of the society.

With declining retail sales, tightening of credit lines, many a larger conglomerates and auto makers have approached the government for loans to save imminent shutdowns. The recession also had its effect on the stock market, eroding capital markets and many 401(k) and IRA’s have already evaporated into thin air.

As per predictions, this is only the beginning and the worse is yet to come.

Insurance premiums on auto and home segments are likely to rise in the near future, due to economic conditions, and they will yet be unreachable for many people since their credit ratings have taken a bad beating.

The general idea is that auto insurance should not have taken a beating since driving without a valid insurance is against the law. However, the downsizing seems to be the effect of many auto owners looking to cut costs and reducing coverage drastically.

This would be obvious since the insurance cover required for the law is much lesser that what it works out to be, including all coverage. In simpler terms, auto owners are opting for bare-bone insurance policies.

At a recent conference call, George Ruebenson (president – Allstate Protection) said while discussing the last quarter results “They are dropping collision [coverage], going to higher deductibles, going to lower limits”. He added “We’re seeing a change from a lot of platinum sales at Your Choice Auto to more of value, where people take a lower-premium policy”. Platinum is the most comprehensive coverage offered by the company for low value policies.

If you understand auto insurance, the premium is the money paid for the required coverage from the insurance company, and collision coverage is the amount of such premium that pays for any accident damage while a limit is the maximum payout per incident.

The incidence of uninsured motorists is also on the rise and will get to alarming levels in the near future. California ranks at almost the very top with over 25% uninsured motorists without the recession. What happens when this rises is anyone’s guess. The claims would only go up and insurance companies have to brace for a bad year coming.

As an end result of layoffs or pay cuts, the budgets many auto owners would go for a tail spin, and thus they are not entirely to blame. Although car insurance premiums for mandatory coverage are quite inexpensive across the country, they don’t give any real coverage apart from bodily injury and collision at minimum levels.

An auto owner usually opts for more to cover against all eventualities, especially against uninsured drivers. With the extra coverage going out of the window, the uninsured motorists are risking their “lives” along with the hospital expenses, and the insured fellas will have to shell out more than they would have in the event of an accident.

Looking at from the insurer end, any insurance company would collect premiums and invest a major portion of it in stocks and bonds. They are secure and are safe from recession caused erosion. But with the future looming gloom and predicting more payouts and lesser premiums, some form of financial instability in the insurance sector can be expected.

Other factors may come to the fore in the future months include:

1) An increase in insurance policy shopping: With no driver willing to get on the other side of the law, they will look for options like cheap or discounted auto insurance policies which will go against the normal working processes of an insurance company.

2) Lack of new sales: As a result of lesser spending power, with fewer and fewer new cars sold, new insurance policies would be hard to come by effecting finances adversely. With fewer policies sold, the insurance companies would be compelled to raise rates of premium for new automobiles.

3) Increase in coverage: A fewer percentage of people may want to brace against the bad times to come and use insurance as a hedge against it. Paying a few extra dollars a month would be lesser hardship than having inadequate coverage during a crisis.

The above are a few factors that may come into play singularly or in combinations. With the new president at helm, everyone is already optimistic about his plans to rebuild the economy. But, as of now, gloom prevails and the future does not look so optimistic. With investments going down under and customer confidence taking a nosedive, it will take some effort to get the truck back on track.

With so many businesses failing by the day, customers need to understand that insurance companies are also a part of the same economy and do have higher financial stakes. Any insurance company may fail while weathering the recession storm.

Unlike other industries and businesses, as an insured, you are protected by state and federal laws, and you will not lose your coverage. However, in these times of crisis, if you are shopping around for auto or home insurance, it will be wise to check the insurers credentials with a scale such as Standard and Poor’s Insurer Financial Strength Rating before buying a policy. These ratings range from triple-A to C, and they are clear indicators to where you are headed with the insurance company.

As an auto owner, it is advisable that you continue with your insurance at budgeted terms and do not do away with it altogether. Keep your head above the law, although it may take some effort. There is no point depreciating your credit rating just because the economy is going through a recession. Hopefully, it is a temporary phase and will blow away in a short period.