Insurance companies in the United States are expected to benefit from a reduced corporate tax rate, which fell to 21 percent from 35 percent on January 1, but that doesn’t mean you should expect a break on car-insurance premiums anytime soon. Like other big businesses, insurers applauded when tax-reform legislation was signed into law near the end of 2017. Property and casualty insurers are less enthusiastic, however, to hear consumer advocates argue that a break in taxes means policyholders should get a break on rates.
In late January, the Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ) sent a joint letter to insurance commissioners in 50 states and the District of Columbia, calling on them to immediately require insurers to lower rates, which the groups described in the letter as already “excessive.” The CFA and CEJ point out that the lower tax rate will have a positive impact on the insurers’ profit provision, which is baked into insurance rates—along with claims and other expenses—that they submit to state regulators. The groups said that if state insurance commissioners do nothing to force lower rates, the profit windfall for insurers will be $25 billion or more, with no benefit to consumers. “No matter how you calculate it, it’s a big windfall [for insurance companies],” J. Robert Hunter, the CFA’s director of insurance, told Car and Driver.
Not surprisingly, insurance lobbyists disagree. In response to the CFA and CEJ, the American Insurance Association (AIA) and the Property Casualty Insurers Association of America sent their own letter to the insurance commissioners, arguing that the consumer groups oversimplify the impact of the federal tax changes. C/D received no response to messages seeking comment from the AIA.
California, known as a more aggressive insurance regulator, is so far the only state to publicly heed the CFA/CEJ’s call. Dave Jones, the state’s insurance commissioner, has ordered a review of insurers’ rates to see where consumers could benefit from the new tax cuts. “Insurers will now realize significant savings from these recent tax reductions,” Jones said in a January press release. “Policyholders should also benefit from the reduced taxes paid by insurance companies.”
But in an email to C/D, a California Department of Insurance spokesperson said that initial indications are that auto insurance premiums “will be minimally affected, with results differing by insurer.” Many of the auto insurance rates that were already approved for the year were well below maximum rates allowed anyway, the spokesperson said.
Auto insurers have generally been looking to increase rates, not cut them, according to Brett Horn, an industry analyst with Morningstar. “Over the last few years, [auto insurers] have been caught flat-footed with increasing claims, and the companies have been responding to that,” Horn said. One reason for the rising claims is there are simply more Americans driving more—and thus more crashes—according to data from the Insurance Information Institute (III). An increase in distracted driving, along with more costly repairs as new vehicles become more technologically complicated, are also blamed for rising claim costs. A crash that used to require just a new bumper or grille may also involve replacing cameras or radar sensors in cars equipped with some of the latest safety systems.
Still, some consumers could see some relaxation in rates because of competition among insurers if, after crunching their numbers, they identify enough savings through lowering rates to woo more customers, Horn said. “If anything, the competitive reason is likely to be a faster reason [for reduced rates] than the regulatory response,” he said.