Commercial Auto: The Long Road Back to Profitability

The signs were there in 2000—and now it can safely be said that prices in the commercial auto industry are definitely firming. But how long it will take the industry to truly return to profitability is still hard to pinpoint. Unlike about 15 years ago, when the return to a hard market hit suddenly and prices went sky-high seemingly overnight, this market hardening seems to be taking place in a more measured way.

“It’s definitely hardening, and prices are continuing to firm up,” said Madison Macon, vice president of marketing at Jacksonville, Fla.- based Carolina Casualty Insurance Company, which writes commercial auto coverages in nearly all U.S. states.

However, Macon noted that while in some areas of the country, pricing has gotten extremely tight with very few markets participating, in other areas there still seem to be more players, and prices are not being pushed up as quickly.

“The Northeast has been hit pretty hard—a lot of it New York, New Jersey,” Macon said. “Prices are definitely firming in the West. Los Angeles probably is feeling more hardening than some of the more rural areas of California, but it’s not as critical as I’ve seen in other areas. We’ve seen some markets pull out of trucking altogether. There’s been some consolidation in the industry as well.”

Driving factors
The single biggest factor driving the current pricing trends can be summed up in one word: losses. According to Macon, because pricing has been so soft for so long, for every dollar brought in, some companies may be paying out as much as $1.30-$1.40. In addition, reinsurers are raising rates, especially in the areas that have hurt them most: workers’ comp and commercial auto.

“That can be a big number in the insurance company’s expense factor, and they have to pass that back through,” Macon explained. The stock market and shareholders also drive price increases. “You’re a public company, so you have to report all this to your stockholders,” he said. “You have to protect them, so you have to get your rates up.”

But what is commonly referred to as the commercial auto market is actually the fusion of numerous different segments; and while the consensus is that a gradual return to a hard market is at hand, those different segments have been moving differently.

Mike Dwyer is president and CEO of Sinclair-Dwyer & Co., a wholesale/retail broker for commercial lines based in San Francisco, Calif., which as a wholesaler deals primarily in public auto for social service agencies. “In the public auto side, we have seen companies beginning to withdraw from the marketplace altogether and…a price increase of a minimum of 25 percent and probably going higher,” Dwyer said, adding that the for-profit side seems to be moving more slowly.

“There are still companies out there with very competitive rates,” he said. “My guess is their reinsurance contracts haven’t come up yet. Some of the big players have been raising their rates steadily.”

Bumpy areas
Gray Scott, president of the MGA surplus line broker Trans Cal Associates, a Sacramento, Calif.-based company that offers a broad range of commercial facilities, said his company tends to get the smaller risks.

“That’s just because the market is still on the soft side, but…in certain areas, we see a lot of firming up,” he said. “There just isn’t much out there for non-fleet long-haul trucking… I’m seeing some tightening among those who have a stand-alone program for physical damage or where physical damage is in conjunction with liability.”

Scott said that the average carrier rate increase has been in the neighborhood of 20-25 percent, and he has seen rates for certain classes, like taxicabs and courier services, go up as high as 50 percent. “I’m also seeing some effective rate increases as a result of classification shuffling or where a rating mechanism has been changed,” he said.

Several areas of commercial auto are currently struggling to find insurance. For example, the number of markets writing passenger transportation has shrunk considerably. One of the toughest public auto classes—taxicabs—is being forced in some cases into the assigned risk market.

Scott welcomes the fact that this tightening of the market is happening in stages as opposed to “a cataclysm like we had in the Fall of 1985,” which could bring bad public image and regulatory pressure.

Macon noted what can happen when a state has large personal injury protection (PIP), a no-fault coverage, required by law in certain states. For example, New York and New Jersey have PIP limits of $50,000 and $250,000, respectively. “In New Jersey, an insurance company is required to pay up to $250,000 per person in a public transportation vehicle if there is an accident,” Macon said. “The companies have taken significant financial loss in these areas, so rather than try to raise their prices, they’ve just made a decision [to get] out of this business altogether.”

Classes of business that are tough to fill because of the loss potential include vehicles carrying hazardous materials, like fuel haulers. Moreover, fewer markets have been participating in the areas of tow trucks, logging, and sand and gravel.

Jim Furey is CEO of the managing general agency AmCom Insurance Services in San Ramon, Calif., which writes a preferred artisan contractor program and a sand and gravel program. Furey said that when many reinsurers hear the words “commercial auto,” they think long-haul trucking, taxicabs, limo services, airport buses and the like. “But the artisan contractor is a different segment of it,” he said. “That didn’t soften as much, and it’s not hardening as much. We have filed and are about to be approved on a 10-percent increase. So it seems to be going in the right direction.”

Road to success
“From a general agency standpoint, it’s difficult because everybody’s basing commissions on results,” Furey said. “If you’re not getting the results, you’re not going to get any commission. You’ve got to maintain good loss ratios. I think some of the players are going to go by the wayside, especially the general agents. The good ones are going to be in a lot better position at the end of 2001.”

During a soft market, a lot of things, like underwriting, get loosened up, and companies may do things just to hold marketshare they typically would not do. “When the market turns and starts to harden, one of the first things you do is start re-underwriting your book because you’ve got a book of underpriced business that is hurting you,” Macon said.

Scott agreed that companies need to get back to careful underwriting, a major facet of which is verification. He also noted a growing trend of material misrepresentation on the part of insureds and brokers that he is seeing on the wholesale side. “We deal with a lot of small, substandard auto and trucking,” he said. “I’ve seen a curve upward in the last five years or so of misrepresentations on applications that have to do with anything from radius, to the type of drivers that are used, to the condition of the vehicle—a lot of fraud coming through.”

However, Scott emphasized he doesn’t want to paint a picture that’s all criminal activity. “It’s a little known fact in California that misrepresentation need not be purposeful,” he explained. “It’s just a matter of—was it an accurate representation or not? The company can actually deny a claim if a client gives information that is not true, but he doesn’t know any better.”

Keep on trucking
Even though commercial auto insurance encompasses vehicles ranging from what is basically a family car to an 18-wheeler, any conversation about market trends often focuses heavily on trucking. Part of the reason for this is the enormous amount of goods shipped by trucks in the U.S. and the fact that trucking is federally regulated. And recently, for anyone operating a commercial vehicle for hire—be it a limo, a taxicab or a fleet of trucks—delivery costs have gone up as a result of rising fuel prices and other factors.

“That does not necessarily affect insurance, but it does affect how the insurance companies come out in the end,” Macon said. “We’ve seen accounts park their trucks as opposed to taking the rate increases because they can’t afford it.”

Among the numerous legislative issues currently on the table for truckers is hours of service. “Anytime you get a fatigued driver behind the wheel of an 80,000-pound vehicle, you’ve got a problem,” said David Golden, director of commercial lines with the National Association of Independent Insurers (NAII). “That’s what the Federal Motor Carrier Safety Administration [part of the Department of Transportation] is trying to make better. Now, everything is a balance between shippers’ needs to make trucking as efficient as possible, and the public’s needs for safe roads.”

Dwyer opined that brokers could really assist their clients by becoming more proactive in focusing those clients on safety and loss prevention techniques. “The bulk of the risks we see when we send them the supplemental questionnaires [is they] don’t have safety meetings…[or] driver training programs,” he said. “There’s no focus on trying to reduce the losses to the carriers.”

Private property?
Legislatively speaking, privacy laws that have recently gone into effect—including certain provisions of Gramm-Leach-Bliley and the Fair Credit Reporting Act—have a great impact on commercial insurers. On the claims side, there are also privacy provisions coming out of the Health Insurance Portability Accountability Act.

“We talked about using credit ratings as part of our underwriting criteria,” Macon said. “We basically determined we can’t do it. Other companies have used credit scoring, but I think now they’re under scrutiny for doing that.”

Another tool used in the underwriting process, the ordering of motor vehicle records (MVRs), has also become more complicated. Golden explained: “An employer has the right to pull an MVR on an employee. An insurer has a right to pull the MVR on a driver. But it hasn’t been completely resolved yet that the insurer still has the right to share the MVR of the employee with the employer, who is the customer of the insurer. If you’re acting strictly as the insurer in an underwriting capacity, you fall into one category. As soon as you start to share it with somebody who is a non-affiliated company, which would be your customer, you run into trouble.”

Overall, Golden said auto insurers are facing very complicated provisions on privacy coming at them from a number of different directions all at once. As a result, they run the risk of doing something to comply with one regulation that could put them in violation of another.

Back on track
Going forward, many commercial auto participants are optimistic about the future. But many predict that dramatic results won’t be seen before 2002. Claims can take a while to develop, and companies really don’t know the effects of writing premium in a certain year until perhaps two to three years down the road.

Diversifying will be an important strategy at Carolina Casualty, which has been primarily focused on public auto and small trucking fleets. “We’re looking at writing more fleet business now; we feel the pricing is there and can warrant getting back into that area of the market,” Macon said. “…We are trying to look at all sectors of the market and find an area that’s underserved by the insurance industry where we can feel like we can make an underwriting profit.”

Although 1999 and much of 2000 were very bad years for many commercial auto carriers, setting an aggressive growth goal for 2001 may be the course of choice for some insurers.

NAII’s Golden pointed out that many people working in the industry—in companies, agencies and brokerages—may have never seen prices do anything but go down. This presents a whole new set of challenges. “For the whole transaction, people are having to learn what happens when… prices are going up,” he said.