Still an Uphill Climb for Commercial Auto Market
The difficult job of moving commercial auto insurance to a profitable place has not gotten any easier.
More vehicles on the road thanks to a rebounding economy, more miles driven, distracted drivers and “nuclear” verdicts are all adding to troubling performance trends in the commercial auto segment.
That’s not all.
“At an industry level, we continue to see some adverse loss development from prior AY (assessment) years, further contributing to poor results,” Mike Miller, Progressive’s commercial marketing business leader, told Insurance Journal.
Many carriers are restricting business, getting out of certain segments altogether, or taking rate to cover trends. “Generally, there’s also a higher degree of review on renewals, impacting terms and rate, and some carriers are increasing non-renewals,” Miller added.
Price increases in today’s commercial auto market are the norm, says Greg Rose, product director in commercial lines, who is responsible for State Auto Insurance Companies’ commercial auto business. Rates are up single to low double-digits, he added.
Insurers have posted net underwriting losses in commercial auto over the past six years in the line, according to a recent A.M. Best market segment report, “Commercial Automobile Sector Struggling to Keep Pace.”
While commercial auto insurers have tried to address unfavorable results by tightening underwriting and improving rate adequacy, the changes haven’t been enough to aid the distressed line overall, at least not yet.
Adverse reserve development has contributed to consistent increases in net underwriting losses over the past six years, according to A.M. Best. “Insurers initially appeared slow to react as loss trends outpaced rate increases, and commercial auto underwriting losses grew from $744.8 million in 2011 to slightly over $2.9 billion in 2016,” the report said. Insurers have been left to play “catch up” as profitability remains pressured, and, as loss costs continue to rise.
But according to Rose, many carriers have taken steps to reverse the trends. In his view, it will be those carriers that will see more positive results sooner than later.
“There seems to be a split between carriers that have taken the necessary rate increases and underwriting changes to keep up with the loss trends versus those who haven’t,” Rose said. “Those who haven’t made changes and are choosing to ignore the signs and look at the overall package, are going to get hurt in the long-term.”
There is lots of discussion about carriers exiting the commercial auto market in some form or another.
“We are constantly hearing rumors of carriers exiting but I’m not really sure if they are true,” said Ed Havermann, vice president, transportation division, at Keating, a national wholesale brokerage. Even if the rumors aren’t true, Havermann says everyday he sees rates going up, underwriting getting tougher, certain classes of business become more distressed and carriers are pulling back.
“Overall I see it tightening up. Average accounts to more distressed accounts will see rates going up.” Only the better than average accounts will see rates holding steady.
It’s not all bad — good or “hairless” risks can do well, says Cal Landess, president, Pacific Gateway Insurance Agency, an owned general agency of the National Indemnity group of insurance companies, a subsidiary of Berkshire Hathaway Inc.
“Obviously, the great risks in any class can usually find a home,” Landess said. But if there’s any kind of “hair” on a risk, especially in challenging classes such as trucking for hire, tow trucks, non-emergency medical transportation and even charter buses, agents will find it difficult to find an available market. “Those hairs eliminate so much of the marketplace, immediately, which has to be frustrating for retailers,” he said.
Progressive’s Miller agrees. “A couple segments remain hard to place, specifically new ventures and towing operations,” he said. Miller added that courier and expediter classes can also be challenging. “However, there’s still a good market for more tenured, clean risks.”
Even the clean risks could have some trouble ahead, according to Landess.
“If they are continuing to be renewed by their current carrier, are a really good risk, they will probably be offered reasonable terms,” he said. However, if the current carrier for whatever reason has nonrenewed the policy, even if it’s because that carrier has decided to retire from a specific class of business, things will be rough.
For example, Landess explained, if “ABC insurance company is retiring from gasoline haulers, they are retiring from that book of business, you could have a great risk in that class of business that is being nonrenewed. That impacts the marketplace because simply because it’s being nonrenewed.”
A good broker will explain that it’s not the fault of the insured – and perhaps that will open the doors for a few markets. “But again, now you’ve got a book of business, for this particular risk, that’s been placed on the streets, it’s a reasonable risk but it’s a tough class, tough marketplace, it will probably have a hard time finding a home if it doesn’t fall into a program – and programs are falling apart left and right,” he said.
This scenario could play out again and again as more carriers limit their offerings in commercial auto, Landess said. “For example, recently our home office was advised that Zurich is getting out of a lot of commercial auto,” he said. “You take a company the size of Zurich and if they dump a large book of commercial auto business on the streets in a tough environment, tough marketplace to begin with, where there’s limited capacity, some of it becomes distressed immediately.” The more difficult risks within that book of business will have a hard time finding a home.
While there is a lot of market capacity in the overall property/casualty market, commercial auto has been a loss leader for the standard market insurers for many years, Landess said.
Those standard companies right now are trying to get rid of some commercial auto, he said.
“The difficulties of underwriting commercial auto are being compounded by rising claims frequency owing to more commercial vehicles being on the road as the economy rebounded following the recession; the record growth in miles driven; and an increase in distracted driving,” A.M. Best said in its recent report.
Rising vehicle repair and medical costs are also driving up claims severity.
“After lagging by several quarters, insurers have made concerted efforts to raise rates, but have been unable to stop the bleeding,” the report said.
Reversing the unfavorable results in commercial auto will be a challenge for insurers for years. A.M. Best says, the industry will have to be more discriminating when it comes to risk selection, prudent reserving, and pricing.
“On the positive side, the results of the aggressive rate increases — particularly over the last two years — should start manifesting over the near term,” the report said.
Average rates increased by 5.4 percent, 6.1 percent, and 7.3 percent in the first three quarters of 2017–the largest quarterly consecutive increases–as insurers worked to offset the rise in losses and improve profitability.
The calendar year combined ratio in commercial auto increased sizably, to 110.4 percent in 2016 from 94 percent in 2007, according to A.M. Best. The loss and loss adjustment expense ratio, which rose 27 percent in 10 years, due to both adverse reserve development and inadequate pricing, has been the main contributor to the deterioration in the combined ratio.
A.M. Best noted that “whether the increases will be enough to reverse the trend in underwriting losses is still too early to tell.”
“Frequency and severity may continue to rise in line with economic growth, which the use of more detail-focused underwriting (using effective loss control and risk management techniques), in addition to continued rate increases, could help mitigate,” Best noted. “However, there will be more pain — owing to factors such as distracted driving and attorney involvement — before insurers realize any long-term gains from focused underwriting and pricing efforts.”
One thing transportation experts agree on is that something’s got to change for the commercial auto market to make a turnaround. Aside from rate adequacy for the line, there’s hope in better managing safety.
State Auto’s Rose said he encourages agents to get involved and embrace the telematics and fleet management movement. State Auto launched its Fleet Safety 360 telematics product, free to commercial auto fleets, last September.
“The adoption rate for telematics is very low across the U.S. and as an industry we need to do a better job of educating insureds,” Rose said. While adoption rates are rising some, Rose believes agents can play a role in helping commercial auto clients to understand the importance of telematic tools.
“I think a lot of agents tend to not understand or see telematics as big brother versus the benefit gained from using telematic products,” Rose said. “It’s the key to bringing down both frequency and severity in commercial auto.”
If there’s any kind of “hair” on a risk, especially in challenging classes.
Rose said some telematics devices offer much more than “big brother” value. “For State Auto, it’s a key tool we are using as we go digital.”
State Auto offers commercial auto insureds an automatic 10 percent premium discount just for signing up during the first year. If the policyholder keeps the devices after renewal, they can be eligible for up to a 25 percent policy discount based on how the fleet performed during that first year.
While the Fleet Safety 360 product is still evolving, Rose sees great benefits for the sector going forward.
“With telematics there’s the capability in the very near future to actually monitor an accident in real time,” he said. “There’s unlimited potential.”
Rose said State Auto currently doesn’t “surcharge” for negative behaviors discovered under its Fleet Safety 360 tool, but the insurer does utilize the data for underwriting. Right now, the program is gaining the most traction in the medium size fleet category, those with greater than 10 vehicles but less than 50 vehicles.
According to Rose, there aren’t many companies playing with telematics in commercial auto. But he believes more will jump in. “When that happens, you will see more that it’s not just about price — it will be about what tools can insurers offer them.”
Progressive, which has utilized its own usage-based telematic tool — Snapshot — in personal auto for years, is “very excited about the use of telematics data in the commercial space,” Miller said. “In addition to leveraging our learnings about driving behavior from our personal lines organization, we see a lot of opportunity to understand more about commercial vehicle usage for underwriting applications.”
Late last year, just as the federal mandate for electronic logging devices (ELDs) went into effect, Progressive launched its Smart Haul usage-based insurance program for truckers in most states.
“With this program, we utilize information collected from ELDs and offer qualified trucking risks savings on their commercial auto policy premium for sharing their ELD-generated driving data with us,” Miller said. “Early market response to our Smart Haul program has been encouraging, and we expect it to continue to grow as market utilization of ELD devices increases with stricter enforcement of the ELD law in 2018 and truckers develop richer telematics driving histories.”
Dave Nelson, second vice president, product, commercial accounts, at Travelers, agrees telematics has a rightful place in commercial auto. “Proper use of telematic devices can have a favorable impact on fleet operations,” he said. But he says the effectiveness of telematics tools in a fleet operation has a lot to do with good communication from managers to drivers.
“One key area that we identified was communication between the fleet manager and the drivers,” Nelson said. “A good, open relationship is really important to coach safe driving behaviors.” Sometimes a driver may have had to take an action on the road and without good dialogue with their fleet manager, drivers can feel like “big brother” is watching. “That’s a big focus for fleet managers to position it [telematics implementation] properly,” he said. Even before fleet managers fully engage with a telematics program they should have a good foundation on the in-and-outs of its usage established with drivers.
Not everyone is convinced that telematics offers the best relief to the troubled commercial auto line. Keating’s Havermann worries more about the “human element” that’s driving claims today.
“One thing I’m afraid of is that the industry is going to think that we can throw in telematics and everything will be hunky-dory but we will still have that human element,” he said. Telematics will help loss trends. “They are helping.” Frequency of claims are going to go down and now truckers are able to protect themselves a bit more with things like drive cams. “Now we can show that the trucker is in the right and didn’t do anything wrong,” he said. “So, yes, your safety scores are going to drop.”
However, sometimes the devices, whether GPS tools or dash cams, don’t always work in the driver’s favor, said Bob Reardon, president of Keating’s tKg Brokerage. “Sometimes those devices can prevent a claim, but they can also add to severity by proving negligence of the driver in court,” he said. “They can go against the risk as much as it helps the risk.”
From Havermann’s view, old-school training is the best way to combat poor results in commercial auto.
“I don’t think people are paying attention to straight-up training, especially in trucking,” he said. In years past, driver training was more of a focus for insurers. “Training was mandatory, and insurers were sending out people to do safety meetings, and all that. I believe the industry was running a bit better.” But as costs had to be cut, those services fell by the wayside, Havermann said.
“People just need to focus more on safety,” he said. The livelihood of truck drivers needs to get better, too. If that happens, the industry will see a better pool of quality truck drivers in the market. “Truckers should have better accommodations on the road and then you will get a better driver. It will help.”
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