The Profits of Recession

During the next few months, some 8.5 million Americans will receive a check that is almost as rare these days as a winning lottery ticket: a partial refund on their automobile insurance premiums. The lucky recipients are policyholders of State Farm Mutual, the nation's largest auto insurer, which revealed this week a $112.2 million underwriting profit for the first six months of 1971, compared with an $18.4 million loss in the same period last year. The company's overall earnings after taxes have shot up to $108 million --an astonishing 500% improvement on last year's first-half figures.

Because State Farm is a mutual insurer, in effect owned by its policyholders, its officers must use the profits either to lower rates or make refunds. State Farm chose to make refunds, since lower rates might be hard to raise if profits fall in the future. But the effect is the same. All together, the company will distribute $30 million to policyholders in 31 states and the District of Columbia, the areas where its operations were profitable.

Less Carnage. The profits of some other large auto underwriters are also expanding, though far less dramatically than State Farm's. The payoff may lead to the first lowering of auto insurance rates since World War II, or at least a leveling off. Among companies that are considering or have already announced selective cuts are the Insurance Co. of North America, Hartford Fire Insurance Co. and Illinois' Kemper Group. Despite the steady rise in medical and repair costs--which have not even reversed the trend toward higher rates in some states--a number of companies have lately experienced a notable drop in the frequency of claims. Officials of State Farm, which insures one out of every seven U.S. cars, report that claims during the first six months of the year fell 7% for bodily injuries, 12% for medical payments, 8% for property damage and 9% for collisions.

Why? One explanation is that the nation's long auto-safety campaign, which has led to major improvements in equipment, road design and driver education, is finally paying off. Last year, for one of the few times in U.S. history, the number of automobile fatalities declined slightly, to 55,300. So far this year the toll is still lower by a little. Top executives at State Farm are convinced that another factor is at least partly responsible for their good fortune: everybody else's bad fortune. In short, says Vice President Thomas Morrill, "the frequency of claims is directly tied to the state of the economy and thus tends to decline in a recession."

Hard times, Morrill explains, keep people off the roads. The increase in unemployment, for example, means that fewer workers are fighting their way through accident-prone rush-hour traffic. Those who do get behind the wheel tend to drive more cautiously than usual and do not take as many long trips. A survey last year of the American Automobile Association's 14 million members showed that the number driving their cars on at least five out-of-town trips declined 20% between 1968 and 1970. The recession has also influenced U.S. drinking, which is involved in half of all traffic fatalities. A recent Michigan study showed that auto deaths and tavern liquor sales both declined in 1970. At the same time the sale of package liquor goods--which are usually consumed at home--rose. As Morrill puts it: "The fellow drinking beer in front of his living-room TV is not an auto-insurance problem."

This file is automatically generated by a robot program, so reader's discretion is required.