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Commercial Auto

Commercial Auto: A One-Way Street?

Once the darling of the P&C world, commercial auto is now its problem child. Faced with escalating losses, insurers have no choice but to continue to raise rates and write smarter.
By: | April 7, 2017 • 5 min read

American road safety had been on an upward trajectory for decades. But in the last five years that trend has gone into reverse — with disastrous consequences for commercial auto insurers.

The U.S. commercial auto insurance industry registered its fifth consecutive year in the red in 2015 with a combined ratio of 108.5. In spite of insurers’ efforts to improve underwriting performance, primarily by raising rates, 2016 will almost certainly go down as another loss year.

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Indeed, while risk management strides are reducing loss experience in virtually all lines, commercial auto is seeing an uptick in both loss frequency and loss severity.

Economic recovery and low fuel prices have led to increasing road congestion, as well as a shortage and higher turnover of commercial drivers, diminishing driver quality. Worse still, the use of smartphones behind the wheel has caused a spike in road traffic accidents, with the National Safety Council estimating that around 25 percent of all crashes are caused by drivers talking or texting. Medical costs are rising, and plaintiff lawyers smell the blood of commercial fleet owners — flocking to the sector and driving liability payouts up to catastrophic sums.

“This confluence of factors came together pretty quickly and caused an abrupt and stark deterioration in results for insurers,” said Jerry Theodorou, vice president, insurance research at Conning.

Jerry Theodorou, vice president, insurance research, Conning

He believes complacency crept into the commercial auto market following excellent results through the 2000s. But in 2011, results suddenly deteriorated, “and commercial auto has been the problem child of P&C ever since,” he said.

“The market is not collecting enough premium to cover the large number of severity losses,” said Jennifer Rowe, who runs Marsh’s Atlanta casualty placement hub, home of the broker’s transportation center of excellence.

“Many markets are paying for a historical soft rate environment where capacity exceeded demand, and underwriters were continuously lowering rates to retain business or earn new business while ignoring early signs of adverse claim development.”

A.M. Best Senior Financial Analyst David Blades pointed out that quarter-on-quarter rate increases have been the norm since Q2 2011, but even these consistent rate hikes have not kept pace with escalating claims costs.

“A lot of big public insurers — solid underwriters — are taking a step back to re-evaluate the type of risks they write in their commercial auto books,” he said.

Indeed, the sector has already seen some major names run for the turnstiles, with trucking noted as a particular problem area. Zurich pulled out of the primary market, while in the excess space, Lexington withdrew and AIG cut capacity, raised attachment points and increased pricing.

“All [insurers] have recently adjusted their pricing models upward,” said Rowe. They think they are approaching the “right” levels but are not 100 percent sure, he said. Confidence is undermined to a degree by the long-tail, recurring and potentially escalating cost of liability claims.

Berkshire Hathaway Specialty Insurance’s vice president of casualty, Bill Smyth, for example, said that having entered the excess trucking auto liability market in 2013, his firm’s book is “too green” to know how profitable it is.

On an excess basis, Rowe predicts rates will remain unsettled at best. Additional rate pressure “will be the new norm in lead and buffer layers for the next year,” she said, noting capacity remains limited, primarily for larger transportation risks (1,000-plus units). However, she is seeing more stability now in the primary markets, which have consistently raised prices and retention layers over the past few years.

Selectivity and Sensitivity

According to Conning’s recent report “Commercial Automobile Insurance: Fix Me, Please,” there is a wide performance gap between commercial auto insurers, with the top quintile consistently outperforming on profit by around 20 points, while demonstrating superior loss and expense ratios.

But why are some insurers able to profit in this line, while others wither and die? Consensus is the convergence of risk selection and analytics.

“Companies are refining their appetites in terms of the risks they want to write,” said Blades. Some companies will drop coverage for certain risks, while others will step away from the line altogether.

“We believe this is a cyclical deterioration and results will improve with insurer corrective actions — though it is taking longer than it should.” — Jerry Theodorou, vice president, insurance research, Conning

But knowing which risks to write, which to avoid and how to accurately price them is impossible without thorough loss analysis.

“Top quintile companies are much more aggressive users and collectors of data,” said Theodorou. From insurers’ own loss data to the driver records and loss histories of insured firms, Department of Transportation statistics and — increasingly — tools such as telematics, “there is now much more focus on rate adequacy and rating precision according to market segment,” Theorodou said.

David Blades, senior financial analyst, A.M. Best

Smyth believes that in the lower end of the trucking market, where there is still capacity and rates have not corrected as much, carriers tend to rely heavily on Compliance, Safety, Accountability (CSA) scores to rate risk. “I’d rather look at the customer’s own data than government data, but many carriers in that world have a commercial auto unit rate, and deviate based on how well a customer performs on CSA,” he said.

“I don’t see the U.S. tort system slowing down, and truckers’ cargo rates aren’t going to allow them to absorb a 10 percent increase in insurance costs, so something has to give,” Smyth added. “In the future, the commercial auto market will have to be more technical and data intensive — with fewer players pricing each customer more carefully.”

For insureds — for whom tight margins are making this a bad time for rising insurance costs — this does present an opportunity to take destiny into their own hands by proving their risk management savvy: demonstrating improved route planning or investing in telematics, dashboard cameras and other technology to encourage and record better driver behavior. Still, some auto risks are unavoidable.

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“I know most of our customers are very serious about safety, how they hire people and planning their routes to avoid congested areas, but you can’t avoid New York or Chicago if that’s where the goods are heading, and it’s impossible to control other road users,” said Smyth.

Ultimately, both insurer and insured must get a better grip on risk analysis if the sector is to reverse the alarming spike in accidents while bringing profitability back to insurers.

However, industry sources are optimistic that better times are around the corner. “With better risk selection and more rate increases, we should see results improve over time,” said Blades, while Theodorou also predicted profits would return in line with more disciplined underwriting.

“We believe this is a cyclical deterioration and results will improve with insurer corrective actions — though it is taking longer than it should,” he said. “Commercial auto is still an important line of business for insurers that can operate in the new pricing environment.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]