US commercial auto still struggling

The US commercial auto market remains challenging for insurers, and vast improvement is still needed, according to a report by Fitch Ratings.

Despite repeated rate increases in recent years, US commercial auto insurance remains problematic, with the sector’s combined ratio rising to a 16-year high of 111.1 percent in 2017, according to a report by Fitch Ratings, US Commercial Auto Insurance Market Update.

While industry results are expected to modestly improve in 2018, a combination of loss frequency, severity challenges and reserve issues is inhibiting a return to underwriting profits in the segment.

“Inadequate pricing in the soft commercial lines market prior to 2011 led to elevated commercial auto underwriting losses in subsequent years. More recently, pricing and underwriting actions have largely been negated by unfavourable claims trends in terms of both frequency and severity,” said Brian Schneider, senior director in Fitch’s Insurance Ratings Group.

Adverse claims trends continue to trouble commercial auto insurers. Loss severity concerns derive from growing large loss incidents and higher claims litigation costs. Claims experience is exacerbated by an increase in vehicle miles driven and challenges in hiring well trained drivers in an expanding economy.

Digital devices and more complex vehicle instrument panels are contributing to expansion of incidents tied to distracted driving.

“Consistently rising commercial auto loss severity presents a larger problem for underwriters,” Schneider noted.

“Rising bodily injury losses are causing a problem as the number of larger claims and the size of litigation settlements soared, particularly for larger commercial trucking accounts and heavier vehicles within larger fleets.”

The potential for further claims severity has not abated and requires underwriters to further address this risk through additional risk selection, pricing and underwriting actions.

The sector has generated some sizable rate increases in recent years in response to consistent underwriting losses and reduced levels of market capacity. The Council of Insurance Agents & Brokers’ (CIAB) Commercial Market Pricing Survey reported that premium pricing for commercial auto was up 8.2 percent in Q2 2018, the highest rate increase for seven years.

Reserve inadequacies

Prior-period loss reserve deficiencies continue to affect commercial auto insurers’ profitability, reflecting unexpected claims inflation and poor underwriting and pricing.

Despite traditionally more predictable claims experience and a shorter claim duration (three to four years) than many other liability insurance lines, commercial auto is the worst-performing major commercial market segment in terms of reserve adequacy for the last several years.

The segment experienced unfavourable calendar-year development in each of the last six consecutive years, although the magnitude of the development slowed slightly in 2017 to 5.7 points on the loss ratio, down from 8.6 points in 2016.

There are modest signs that premium growth from rate increases is having an effect on current year results. The sector’s accident-year loss ratio remains elevated, but has slowly declined over the past four years to 77.9 percent in 2017. Fitch’s report estimates the accident-year loss ratio would need to be below 70 percent in order to reach a break-even underwriting result for commercial auto.

In commercial auto a key challenge for underwriters lies in capturing complete, accurate information on an insured vehicle’s intended use, travel path and operator to properly assess risk in the application process.

To gain efficiency and tackle underwriting challenges, insurers are investing more in data analytics, telematics and other technology to enhance pricing and risk selection abilities and manage claims more efficiently.

“Advances in information technology provide widespread future benefits for commercial auto writers,” Schneider said. Faster computer processing speeds, greater data storage capacity from cloud-based technology, internet developments, and the advent of ‘smart’ devices and applications are providing broader sources of information and analytical capabilities for insurers.

Telematics usage is expanding in commercial auto as a tool for tracking and monitoring vehicle activity, providing information to facilitate analytic and predictive modelling efforts to better to comprehend, segment and price risk.

Some of the bigger players seem to be benefiting from these positives. The report notes that only four of the top 15 companies reported overall underwriting profitability over the past five years, but most of the largest underwriters displayed moderate improvement in results, with 10 of the top 15 companies reporting lower commercial auto combined ratios in 2017 compared with 2016.

Four of the top 15 commercial auto insurers reported underwriting profits in 2017, versus only one in 2016.

For the full version of this report, including an analysis of the market share and underwriting performance of the top 15 US commercial auto insurers, visit:  www.fitchratings.com

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