Some carriers are avoiding certain classes of commercial trucking risk, while others are avoiding the space altogether.
Once the darling
of the P&C world,
commercial auto is
now its problem child.
Faced with escalat-
ing losses, insurers
have no choice but to
continue to raise rates
and write smarter.
By Antony Ireland
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.
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.
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
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.
“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,
• Commercial auto has seen a
recent uptick in both frequency
• Consistent rate hikes have not
kept pace with escalating claims
• Carriers are being more selective
about which auto liability risks
they cover, but some have
abandoned the line altogether.
A One-Way Street?