2017: Commercial Automobile Insurance - Fix Me, Please
Commercial automobile insurance has had poorer underwriting results in recent years than any other major property-casualty line. This study explores drivers of the current deterioration in loss frequency and loss severity, whose impact continues to provide headwinds for insurers. The study analyzes the various segments comprising commercial auto insurance, and reviews the long-term performance of the largest 100 commercial auto insurers, identifying drivers of outperformance and underperformance. The study also examines emerging developments and technologies transforming the transportation industry, and opportunities for insurers amid the challenges to achieve improved results in this troubled line.
2. Executive Summary
3. A Deteriorating Line of Business
- Underwriting Performance
- Market Overview
4. Commercial Auto Segments
- Trucks, Tractors and Trailers
- Artisans and Contractors
- Public Transportation
- Specialty Trucking
- Auto Fleets
5. Loss Severity Drivers
- The Severity Surprise
- Rising Utilization and Miles Driven
- Medical Cost Trends
- Litigation Trends
- Loss Severity Insights from Self-Insured Entities
6. Loss Frequency Drivers
- Rising Truck Crashes and Deaths
- More Truck Accidents
- Driver Demographics
- Distracted Driving
- Road Density
7. Commercial Auto Insurer Performance Comparison
- Top Quintile
- Second Quintile
- Third Quintile
- Fourth Quintile
- Fifth Quintile
8. Pathways to Success for Commercial Auto
- Bleak Picture
- Success Pathways
- New Technologies
- Unsuccessful Models
A. Commercial Auto Market Concentration
B. Commercial Auto Results by State
C. Commercial Auto Definitions
D. Truck Classes
E. Commercial Auto Reinsurance Structures
Among the major commercial lines of insurance, commercial automobile has had the poorest underwriting results in recent years. Through the third quarter of 2016, results remained unfavorable from adverse loss frequency and severity trends. The 2015 loss and combined ratios of 87.7% and 108.8%, respectively, were 15 points worse than commercial lines overall.
The turn to unprofitability for commercial auto was abrupt following several years of sub-100% combined ratios in 2003-2010. Buffeted by the current trend of poor results, some major insurers have announced significant pullbacks from the line or its segments. What is more, many insurers are reporting significant adverse loss reserve development in response to growing losses in the liability portion of commercial auto. Some losses are piercing through primary limits and are hitting excess layers and reinsurers’ lines as well. Commercial auto insurers were caught by surprise by the sudden deterioration of results and are trying to catch up with rate increases and improved underwriting. What has led to the current troubles in commercial auto? What will it take to restore results to profitability? This study explores these two pressing questions.
Commercial auto covers a broad range of risks. Commercial auto insurers provide first- and third-party coverage for various commercial vehicles, ranging from handyman vans to ambulances, school buses, on up to E&S market hazmat haulers, heavy, and extra-heavy trucks. Underwriting exposures vary across the segments, requiring specialized skills for successful performance. Recognizing the exposures peculiar to the respective segments, some insurers specialize in one or more commercial auto classes. In this study, we define and quantify the segments that compose commercial auto.
This study analyzes the drivers of commercial auto’s recent underperformance. We devote separate chapters to drivers of loss severity and drivers of loss frequency. Among the factors responsible for loss trends, we explore economic activity, litigation patterns related to liability losses, medical costs, demographic trends characterizing the driver population, and transportation infrastructure conditions. We find that the line’s deterioration in results is not due simply to one or two isolated factors. Instead, there are numerous trends that converged all at once, catching the industry off-guard after complacency from an extended period of favorable results.
Commercial auto insurers do not travel as a pack. We examine the long-term results of the 100 largest commercial auto insurers, grouping them into quintiles. The gap between outperformers and underperformers is substantial, close to 30 points on the combined ratio. The average combined ratio for top quintile performers in the past decade was 88.8%, whereas for bottom quintile insurers it was 118.4%.
The study concludes with a presentation of insurer strategies for improvement in the line’s results. Some of the strategies we identify are already being pursued by the line’s outperformers. We examine as well the potential impact of advances in data and technology in the trucking and transportation industry that may translate into opportunities for better performance. The trucking and transportation industries have been slower than other economic sectors to adopt the latest technologies. However, some insurers already are making effective use of recent developments in data analytics, telematics, and sensors, etc.