AmFam refund: The economics behind auto policy refunds

Madison-based American Family Insurance announced this week it will be refunding $200 million to auto policy owners, $37 million of which will be sent to Wisconsin drivers. The money will be coming in the form of a $50-dollar check, one for each vehicle covered by an American Family auto policy. Other companies including Allstate, Geico, and Liberty Mutual are issuing similar refunds, some in the form of discounts.

Martha Lester, a risk management and insurance instructor at Madison College, has been working in the insurance industry since 1979 and has never seen anything like this. “Companies will give discounts on policy renewals if losses and claims are lower than expected, but this is the middle of a policy period and I’ve never seen that in my career.”

Ken Muth, media relations director for American Family agrees. “This is unprecedented for the industry and the reactions from our customers have been very positive,” Muth explains. “We’ve had some customers contact us and tell us they don’t need the payment and will be donating it to charity.” He said customers appreciate the funds in a format they can use however they want.

Martha Lester

Ken Muth

Insurance companies find themselves with a surplus for obvious reasons. Fewer drivers on the road mean fewer accidents, fewer claims, and greater profits. But why would a company decide to give some of those profits back to its customers? Muth says it’s simply good business. “Our customers are our owners. Working in the long-term interest of our customers is what being a mutual company is all about.”

Lester says the answer may be more complicated. Businesses feel the need to infuse money into the economy at this time, and this is a quick way to do that. Understanding the technical aspect of rates and the filings may provide some additional background on the motivation behind the rebates. Since each company is required to file rates with the insurance commissioners of each state where they operate, adjusting rates is not as easy as simply offering a refund or a discount.

“We are a competitive rate state, and the state does not want the insurance company to have an unreasonable profit,” Lester explains. Additionally, each line of business needs to cover its own claims and losses. For example, the auto policy line of business cannot cover losses for the homeowner’s line.

To determine the amount of the refunds, companies are most likely looking at current data and earned premiums. “The money they have earned so far is what they are returning,” Lester remarks. “They’re not changing the rates going forward. They are looking at the data of today and making an adjustment.”

Muth says some of the data used to determine credits came from real-time information. “We saw a 40 percent reduction of miles driven through our usage-based program called KnowYourDrive and decreased claims filed by our customers.” To be sure, this is not an incentive program or a publicity tactic. The credits are based on actual claims and losses.

It’s difficult to determine how this will play out going forward. “It’s too early to tell if this will turn into a rate adjustment,” explains Muth. “Hopefully, we come out of this sooner than later and then our driving habits change.”

Lester believes the credits will be temporary and reevaluated regularly. “Totally my opinion but I think these are going to be temporary credits that will be continuously looked at depending on how long we stay home. To adjust the rates, insurance companies would need to be projecting losses forward and we just don’t know.”

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