The commercial auto insurance market caught a bit of a break in 2020, when the COVID-19 pandemic forced people to stay home and off the roads, resulting in fewer accidents. According to a Fitch Ratings report, the sector achieved a combined ratio of 101.6% for 2020, a nearly 8% improvement over 2019.

But the change also results from an ongoing commitment to more disciplined underwriting. Rates continue to rise in an effort to catch up with years of unsustainable losses. And despite the modest reprieve of 2020, loss costs will continue their upward trajectory as life and business return to normal. At the same time, carriers are pulling back capacity, especially in the reinsurance market. Insureds looking for large limits will be hard-pressed to find them from a single carrier.

Ultimately, the best way to contend with this hardening market is through loss control. Risk managers who implement strategies to reduce crash frequency and severity can better protect their drivers and their vehicles, improve renewal prospects, and reduce total cost of risk.

“Results for commercial auto were better in 2020, but it doesn’t change the overall pattern of rising loss costs. Currently, it remains a double-digit rate environment. At Philadelphia, the way we underwrite all our accounts is based on experience. An account with minimal loss history will get a better rate,” said Mark Plousis, SVP of Underwriting at Philadelphia Insurance Companies (PHLY).

Here are the top five factors driving commercial auto losses and how risk managers can best mitigate their exposure.

Top Drivers of Commercial Auto Loss Costs

Mark Plousis
SVP of Underwriting at Philadelphia Insurance Companies

Increases in both claim frequency and severity are contributing to growing losses. According to stats compiled by PHLY over the past five years, bodily injury claims severity has increased by 22%, first party property damage claims severity has increased 10%, and no-fault claims severity has increased 25%.  Claim frequency has also increased steadily since 2013, excluding the anomalous year of 2020.

These are the primary factors likely to continue pushing losses even higher:

1) Distracted Driving

Drivers have never had more distractions on the road, and technology is the number one culprit. Whether it’s smartphones pinging in the passenger seat, navigation systems rerouting, or complex in-car entertainment systems, gadgets are almost always competing for drivers’ attention.

Advanced safety features like lane detection and autonomous driving capabilities are meant to help offset lapses in focus, but they aren’t enough to significantly reduce crash frequency. According to the CDC, more than 2,800 people were killed and an estimated 400,000 were injured in crashes involving a distracted driver in the U.S. in 2018.

“I see distracted driving on the highway every day. No matter how much technology we put in cars to make them safer, we still need drivers to pay attention,” Plousis said.

2) Weather Hazards

It’s no secret that frequency of severe weather events is increasing. From heavy rains and flooding to hail and windstorms, Mother Nature poses a growing threat to drivers.

Hail-related claims, for example, have jumped 84% since 2010. Heavy rainfall events have also become more common since the 1980s. According to data from the EPA, “a larger percentage of precipitation has come in the form of intense single-day events” in recent years. Sudden severe downpours make roads treacherous and can catch drivers off guard.

National Highway Traffic Safety Administration data shows that between 2007 and 2016, approximately 21% of all vehicle crashes were weather-related.

“With another above-average hurricane season predicted for 2021, it’s likely we’ll see severe weather continue to drive claim frequency,” Plousis said.

3) Increased Cost of Repairs

All the new technology in vehicles means repairs are more complex and expensive. Cameras and sensors for features like collision warning and blind spot detection are typically embedded in fenders, bumpers and windshields — meaning even minor accidents can result in costly fixes.

“As more technology is added to vehicles, the cost of component parts and labor go up immensely. The price of repairs and replacements will continue to drive up loss costs for commercial auto,” Plousis said.

According to a Deloitte analysis of advances in semiconductor technology, electronics were responsible for 40% of a new car’s total cost in 2019, a 22% increase from 2000. The cost of vehicle repairs rose accordingly, increasing by 61% between 2000 and 2017, according to the U.S. Bureau of Labor Statistics.

4) Medical Cost Inflation

PwC’s Health Research Institute is projecting a 6.5% medical cost trend in 2022, slightly down from 2021 but higher than the trend from 2016 to 2020. Health care costs are expected to continue outpacing economic expansion, increasing from 17.9% of gross domestic product in 2017 to a projected 19.4% of GDP in 2027.

Claims involving medical care will also be complicated by the growing prevalence of comorbid conditions like obesity, diabetes, hypertension, depression and other chronic diseases.

These conditions likely worsened over the past year. People became more sedentary and isolated, which likely contributed to a range of problems including weight gain, declines in fitness, increased stress and anxiety, and unhealthy coping mechanisms such as smoking or substance abuse. Expect comorbids to play an even bigger role in claim severity going forward.

5) Rising Jury Verdicts

A litigious environment and the effects of social inflation have plagued the commercial auto sector for years. Opportunistic plaintiffs’ attorneys and angry jurors are pushing verdicts higher and higher.

For instance, a sample of 451 jury verdicts in the U.S. trucking industry over $1M revealed that the average size of jury awards increased from $2.3 million to $22.3 million — a 1,000% jump — between 2010 and 2018. That’s just one facet of commercial auto; that doesn’t include the impact to commercial private passenger auto, vans and other fleet vehicles on the road every day.

With a reported 1.35 million road-related deaths each year and an additional 20-50 million suffering non-fatal injuries globally, those in the auto industry must stay abreast of potential litigation avenues plaintiffs might take.

The numbers do vary by jurisdiction. “Judicial hellholes” like California, New York City, Cook County (Illinois) and Philadelphia tend to produce the biggest verdicts.

“We’re seeing a lot more attorneys specializing in auto accidents and capitalizing on cases in these regions, which have an outsize impact on claim severity,” Plousis said.

Reducing Risk Through Driver Behavior Modification

Fleet managers and their insurers don’t have much control over the economic, technological and climatological factors at the root of claims — but they can avoid some crashes altogether by monitoring and supporting safe driving habits.

Companies enrolled in PHLY’s GPS telematics program — PHLYTRAC — have so far seen a 19% reduction in claim frequency compared to policyholders not using the program. And it’s available at no additional cost to insureds. The unit plugs directly into a vehicle’s on-board diagnostics port, usually located under the steering column, and requires no professional installation. It tracks a vehicle’s location, mileage and speed and can detect unsafe behaviors like hard braking or turning. Risk managers can easily view their data through an accompanying software program.

“The data helps employers identify drivers who may need additional training. And it provides metrics that can be used to create incentive programs for safe driving. For example, companies may offer a gift card or other prize for any driver who does not exceed 75 miles per hour,” Plousis said.

The program also has benefits beyond liability exposures. Safer driving can result in reduced workers’ compensation risk. Geofencing capabilities can also help to increase operational efficiency. By monitoring driver routes, fleet managers can hold drivers accountable and may be able to identity alternate routes that produce faster deliveries and fuel cost savings.

Insureds can also monitor driver behavior through motor vehicle record monitoring. The internal tracking tool will notify PHLY underwriters of any violations. In states where exclusions are allowed, an insured can choose to exclude unsafe drivers from coverage, thus reducing their risk and lowering their insurance cost.

PHLY also offers free online driver safety training, including a course focused on mitigating distracted driving. The courses are accessible, along with other educational materials, through a dedicated commercial auto support resource page.

“We know this market well and are committed to providing reliable coverage for our insureds. The investments we’ve made in risk management resources have and will continue to help our clients thrive in this challenging market,” Plousis said.

To learn more, visit https://www.phly.com/products/CommercialAuto.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.