Commercial Auto insurers have been pulling back under strong headwinds from increasing claim severity, the slow national economic recovery and strong competition. How have these factors combined to make it difficult to achieve underwriting profits?
- Claim severity. The average bodily injury claim has been steadily increasing over the past two years. These increases are being driven by escalation in medical costs and greater litigation and defense costs. Medical inflation, while dampened in the past few years, still increases at greater pace than the inflation rate of the overall economy.
- Competition. The commercial auto market has seen many new entrants over the past ten to fifteen years. Standard property and casualty companies decided that commercial auto was a market showing high returns and a relatively easy market to enter, either directly or by working with managing general agents (MGA’s). The Federal Risk Retention Act make it possible for a number of small, lightly capitalized risk retention groups to be formed and start writing business.
- National economy. The slowdown in the national economy had a severe effect on the trucking industry. Due to slower economic activity, there was less manufacturing requiring fewer trucks to deliver goods. Escalating gas and diesel prices up until recently have meant few take home dollars, especially to the independent owner-operator. The slow economy and reduced earnings meant maintenance deferred and longer use of older vehicles. These economic conditions also forced many drivers to look for alternative jobs or sources of income.
Now that there are some signs of life in the U.S. economy, underwriters continue to face challenges in obtaining underwriting profits.
- The exodus of experienced drivers over the past six years means more drivers on the road are inexperienced. This can cause an increase in loss frequency.
- Many of the larger fleets are scrambling to find drivers to put behind the wheel. So some cut corners and may hire either inexperienced, untrained drivers, or drivers who have bad driving records and long accident histories.
Potential Higher Liability Limits
The U.S. Congress has been debating an increase in the minimum liability limits truckers are required to buy. In April, the Federal Motor Carrier Safety Administration (FMCSA) issued a report which said current minimum liability limits are inadequate. This report has pitted the plaintiff’s bar lobbyists against the motor carrier lobbyists.
In 2013, Congress passed a bill that would increase the current minimum for motor carriers transporting goods from $750,000 to over $4.0 million, and adjust the amount annually for inflation relating to medical care. Implementation of this bill has been delayed by a amendment denying funding to the FMCSA, passed just this past June. The lack of funding makes it impossible for the FMCSA to issue rules requiring higher liability limits.
On one side are the trial lawyers who argue that higher limits are needed because the last time minimum liability rules were passed was in the 1980’s. The provide statistics showing the current minimum limits are not sufficient to cover the increase in litigation and medical costs over the past thirty years.
On the other side are the truckers who argue that higher limits could increase liability insurance premiums up to 400% and cause as much as 40% of the trucking industry to go out of business.
Insurance industry experts assume higher limits will lead to higher average claim settlement values.
These higher limits could also put pressure on reinsurance affordability and capacity; and put pressure on small insurers’ balance sheets.
Commercial Auto: Return to Underwriting Focus
In order to generate underwriting profits in these market conditions, what are underwriters doing?
- Spending more time evaluating the risk. The commercial auto market is too complex to lend itself to snap underwriting decisions. There are many tools and factors that come into play when deciding if a risk could be profitable or not. This is not a time for taking shortcuts or relying on old assumptions.
- Use the available data. The amount and sophistication of exposure data increases constantly. In the past, an underwriter may have had just a loss run and MVR reports. Now there is data available from CLUE reports; data from GPS systems that more truckers are implementing; and internet searches that can help validate information on the application regarding commodities hauled and distances traveled.
- Be more immune to pricing pressures. There are fewer insurance companies chasing commercial auto business. So it’s harder for the broker to put pressure on underwriters to give up pricing integrity. In fact, it hasn’t been this easy to get higher prices in years.
Based on my own unscientific surveying of a few commercial auto underwriters, it looks like those companies with the intestinal fortitude to stay the course are able to obtain pretty meaningful rate increases on both new and renewal accounts. The question is: how long will this last? In the past, we’ve seen a return to profitable underwriting of this class attract new players pretty quickly. The perception is with such a huge market, even a small discount off current market pricing can generate a big influx of new business, and underwriting will only take “a small hit”. Thus the slippery slope downward starts anew.
What do you think about current market conditions for commercial auto? Do you see prices rising, or have we already reached a plateau? Leave me a comment below.
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