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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

Risk Management

The Profession: Curt Gross

This director of risk management sees cyber, IP and reputation risks as evolving threats, but more formal education may make emerging risk professionals better prepared.
By: | June 1, 2018 • 4 min read

R&I: What was your first job?

My first non-professional job was working at Burger King in high school. I learned some valuable life lessons there.

R&I: How did you come to work in risk management?

After taking some accounting classes in high school, I originally thought I wanted to be an accountant. After working on a few Widgets Inc. projects in college, I figured out that wasn’t what I really wanted to do. Risk management found me. The rest is history. Looking back, I am pleased with how things worked out.

R&I: What is the risk management community doing right?

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I think we do a nice job on post graduate education. I think the ARM and CPCU designations give credibility to the profession. Plus, formal college risk management degrees are becoming more popular these days. I know The University of Akron just launched a new risk management bachelor’s program in the fall of 2017 within the business school.

R&I: What could the risk management community be doing a better job of?

I think we could do a better job with streamlining certificates of insurance or, better yet, evaluating if they are even necessary. It just seems to me that there is a significant amount of time and expense around generating certificates. There has to be a more efficient way.

R&I: What was the best location and year for the RIMS conference and why?

Selfishly, I prefer a destination with a direct flight when possible. RIMS does a nice job of selecting various locations throughout the country. It is a big job to successfully pull off a conference of that size.

Curt Gross, Director of Risk Management, Parker Hannifin Corp.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Definitely the change in nontraditional property & casualty exposures such as intellectual property and reputational risk. Those exposures existed way back when but in different ways. As computer networks become more and more connected and news travels at a more rapid pace, it just amplifies these types of exposures. Sometimes we have to think like the perpetrator, which can be difficult to do.

R&I: What emerging commercial risk most concerns you?

I hate to sound cliché — it’s quite the buzz these days — but I would have to say cyber. It’s such a complex risk involving nontraditional players and motives. Definitely a challenging exposure to get your arms around. Unfortunately, I don’t think we’ll really know the true exposure until there is more claim development.

R&I: What insurance carrier do you have the highest opinion of?

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Our captive insurance company. I’ve been fortunate to work for several companies with a captive, each one with a different operating objective. I view a captive as an essential tool for a successful risk management program.

R&I: Who is your mentor and why?

I can’t point to just one. I have and continue to be lucky to work for really good managers throughout my career. Each one has taken the time and interest to develop me as a professional. I certainly haven’t arrived yet and welcome feedback to continue to try to be the best I can be every day.

R&I: What have you accomplished that you are proudest of?

I would like to think I have and continue to bring meaningful value to my company. However, I would have to say my family is my proudest accomplishment.

R&I: What is your favorite book or movie?

Favorite movie is definitely “Good Will Hunting.”

R&I: What’s the best restaurant you’ve ever eaten at?

Tough question to narrow down. If my wife ran a restaurant, it would be hers. We try to have dinner as a family as much as possible. If I had to pick one restaurant though, I would say Fire Food & Drink in Cleveland, Ohio. Chef Katz is a culinary genius.

R&I: What is the most unusual/interesting place you have ever visited?

The Grand Canyon. It is just so vast. A close second is Stonehenge.

R&I: What is the riskiest activity you ever engaged in?

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A few, actually. Up until a few years ago, I owned a sport bike (motorcycle). Of course, I wore the proper gear, took a safety course and read a motorcycle safety book. Also, I have taken a few laps in a NASCAR [race car] around Daytona International Speedway at 180 mph. Most recently, trying to ride my daughter’s skateboard.

R&I: If the world has a modern hero, who is it and why?

The Dalai Lama. A world full of compassion, tolerance and patience and free of discrimination, racism and violence, while perhaps idealistic, sounds like a wonderful place to me.

R&I: What about this work do you find the most fulfilling or rewarding?

I really enjoy the company I work for and my role, because I get the opportunity to work with various functions. For example, while mostly finance, I get to interact with legal, human resources, employee health and safety, to name a few.

R&I: What do your friends and family think you do?

I asked my son. He said, “Risk management and insurance.” (He’s had the benefit of bring-your-kid-to-work day.)

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]