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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]