Michael R. Powers — Are High Gas Prices a Boon to Auto Insurers?

Yesterday, Huffington Post Money ran an article by Michael R. Powers, professor of risk management and insurance at Temple University’s Fox School of Business and distinguished visiting professor of finance at Tsinghua University’s School of Economics and Management, and author of Acts of God and Man. In his post, “Are High Gas Prices a Boon to Auto Insurers?”, Powers discusses how gas prices affect insurance costs for both providers and consumers.

Powers begins by addressing the common claim that auto insurers benefit financially from any rise in gas prices. At first glance it seems reasonable that higher gas prices lead to fewer people driving and that fewer people driving lead to fewer accidents, resulting in less of a financial burden on insurance companies. However, as Powers says, “it’s fair to say that ‘not all’s the same ‘twixt the pump and the claim’ — not even the same as it used to be.”

A brief comparison of the Bureau of Labor Statistics’ gasoline and motor vehicle insurance CPIs offers some support for the combined effect of the above three premises. In particular, the insurance index plateaued while gas prices rose during both the periods from 1998 to 2001 and from 2004 to 2008. However, the continued rise in the insurance CPI through the beginning of the global financial crisis to the present — at a time when the gasoline CPI experienced extreme volatility followed by a fairly steady upward climb — hints at an underlying structural change that doesn’t bode well for auto insurers or their customers.

While Powers emphasizes that it is difficult to trace the causes of rising gas prices over the long term, he believes that research into price elasticity of short-term increases is illuminating:

Although long-term effects of increasing gas prices are difficult to investigate (because prices tend to fluctuate up and down over time, preventing the simple analysis of a single, upward trend), researchers have found that short-term price elasticity has declined signficantly in absolute value in recent decades. Today, this quantity is believed to be somewhat lower than 0.1, meaning that a 10 percent increase in the price of gas implies less than a 1 percent decrease in the amount of gas consumed.

Powers concludes his article with a warning:

Regardless of its causes, the decrease in price elasticity offers one simple warning for auto insurers and their investors in the coming years: higher gas prices are no longer the dependable boon they once were. For auto insurance consumers, the message is equally clear: expect no future premium relief in return for today’s high gas prices.