The commercial auto insurance sector continues to be hit by underwriting losses driven by physical damage claims and, to an even greater extent, higher liability awards.
A hiatus in the loss trend during the COVID-19 lockdowns only delayed a return to pre-pandemic headwinds for insurers, and combined ratios remain above 100% for the line.
Both physical inflation — the cost of repairs, parts and labor — and liability increases due to medical inflation and rising court settlements and judgments are driving the poor results, sources said.
“This isn’t new. It’s been a bad line for a long time,” said James Auden, Chicago-based managing director of insurance at Fitch Ratings Inc. Commercial auto registered combined ratios above 100% for 12 of the past 13 years, with lower driving rates during the pandemic providing the exception in 2021.
“The cost of repairs has increased, driven by both the increase in the pricing of parts and labor costs of skilled technicians,” said Joni Cerbone, Oldwick, New Jersey-based senior financial analyst for A.M. Best & Co. On the casualty side, “the line is also seeing a significant impact from rising settlements and litigation, especially against large trucking firms,” she said.
Insurers also see the growing liability challenges.
“We are seeing drastic increases in the number of attorney-represented claimants. Increases in frequency of litigation, coupled with a rise in litigation costs, increases in average settlements and overall third-party litigation funding, continue to be driving factors,” said Kristina Talkowski, Pewaukee, Wisconsin-based senior vice president and leader of middle-market commercial lines at Nationwide Mutual Insurance Co.
Commercial auto continues to see rate increases because loss drivers have not diminished.
“Being able to get rate above a loss cost inflation trend is most important,” said Chris Kopser, New York-based chief underwriting officer, primary casualty, Americas, for Axa XL, a unit of Axa SA. Axa XL’s business includes large fleets with large deductibles, such as national retailers.
“If a carrier can’t get rate above trends that means that their loss ratio is going to go up,” he said, using an actuarial term that forecasts how much more a claim tomorrow will be worth than a claim today.
“You have to make sure you’re charging enough to be able to pay that claim in the future,” Mr. Kopser said. “If you look at trends in commercial auto, they’ve been trending up every year for the last several years, and they’re currently in the double-digit range.”
Large commercial policyholders “have balance sheets that they can take on more risk, and they do that through increasing deductibles. We do see quite a bit of that,” he said.
Axa XL also offers structured solutions to help policyholders retain risk, “so they can actually fund it over a period of time, three to five years, and be able to absorb any loss that happens in that time with their own funding,” he said.
Chris Demetroulis, Kansas City, Missouri-based managing director, transportation, for Arthur J. Gallagher & Co., said repair and replacement costs are much higher than in the past.
“All the technology that’s available now and all the things that go into these vehicles” are more expensive than they used to be, he said, noting a passenger car bumper that was once a high three-figure dollar cost to repair may now be mid-four figures. Increased labor and training costs exacerbate the problem, he added.
While physical risk costs keep rising, they are “fixed costs,” which increase steadily and can be reliably forecast, Mr. Demetroulis said. Far more challenging is the uncertainty on the liability side.
“You can have a claim that historically may have been $500,000, $750,000 or $1 million now cost $3 million, $5 million, $10 million, because of social inflation,” Mr. Demetroulis said.
This has led to more policyholders taking on more physical risk. “The larger the client, the stronger the balance sheet. We typically see more self-insurance on the physical damage,” Mr. Demetroulis said.
The added risk can come in various structures, including a higher self-insured retention below the primary attachment point or policyholders retaining various layers higher up the coverage tower. “There are different ways that we can help ventilate some of that premium and put a little bit more risk on the table for the clients that are willing to take on risk,” Mr. Demetroulis said.
Richard Rabs, vice president of risk management at waste management company Lakeshore Recycling Systems LLC in Rosemont, Illinois, said he has “briefly looked at some alternative structures” but has yet to use any. “I suspect down the road, we’ll be looking at it more and more because we’re going to have to be our own insurer,” he said.
Stephanie McMullen, Blue Bell, Pennsylvania-based Mid-Atlantic regional technical resources director for USI Insurance Services LLC, said the broker’s clients are looking at different equations and permutations of risk transfer to alleviate premium pressure. “If you were to retain X, this is where you could start to see some of the dollars on your premium line items really go down,” she said.
“We are seeing customers take on more risk through greater deductible amounts to help mitigate costs,” said Nationwide’s Ms. Talkowski.
Policyholders “are also investing in bolstering their safety and loss-prevention efforts,” Axa’s Mr. Kopser said.
“We are working diligently to give our drivers all the tools and all the training that they need to succeed,” Mr. Rabs said.
This includes telematics and video in the trucks and “moving more and more to automated systems,” which alleviates the need for drivers to leave their trucks, he added.
“Agents and brokers should encourage their business owner clients to connect with their insurance carrier, which likely can help them with fleet safety program improvement, vendor partnerships for telematics,” and training, Ms. Talkowski said.
