The new year is expected to bring more of the “same old” to commercial auto insurance lines, which include public transportation segments such as buses and motorcoaches. Numerous factors, especially large jury awards, are predicted to produce premium increases of six to 12 percent or more.
Commercial auto coverage overall has not paid for itself since 2010 when its combined ratio was 98.0, meaning losses and expenses absorbed 98 percent of premium revenues.
“That line of business hasn’t made money in eight years,” said Michelle Wiltgen, assistant vice president and national marketing manager at National Interstate Insurance Company in Richfield, Ohio. “The combined ratio for this line of business over the entire industry for 2018 was 110 percent. The outlook for 2020 is for continued elevated loss and combined ratios along with unfavorable developments as in prior years.”
When 2019 results are analyzed, a combined ratio of 109 percent is expected, with losses and underwriting expenses again exceeding premiums.
Insurance brokerage Willis Towers Watson expects most segments of the commercial insurance market to face “sizable price increases in 2020,” and commercial auto is due for some of the largest hikes, “in the range of 6 to 12 percent or more,” according to the organization’s Insurance Marketplace Realities 2020 report.
“We’re seeing the biggest upward push in years,” the report continues. “The commercial liability marketplace is worsening, with deteriorating loss trends continuing to negatively impact underwriting profitability, except in workers’ compensation, where competitive conditions continue. In auto, losses have been climbing significantly for at least eight years, and premium rates, which have been rising for years now as well, are still catching up.”
A report from investment management firm Conning made a similar prediction. “Insurance rate surveys and disclosures from individual insurers point to rate increases commonly in the high single digits and often in the double digits.”
Conning’s recent Commercial Automobile Segment Report explained, “Rising commercial auto loss frequency is driven by a confluence of factors, including higher utilization, distracted driving, deteriorating road conditions and a poorer driver profile. The poorer driver profile is in turn a factor of a driver shortage leading trucking carriers increasingly to hire less experienced, less qualified drivers, who are more prone to get into accidents.”
The firm said commercial auto “has outstripped (the) total (of) all lines property casualty premium growth every year since 2013.”
The commercial auto insurance segment covers many vehicles used by businesses, including automobiles, trucks and buses. The public transportation niche accounts for nine percent of commercial auto business and includes buses operated by schools, churches and for-profit operators providing airport shuttle, sightseeing, inter-city, charter, athletic and entertainer services.
The trucking industry accounts for about 48 percent of commercial liability underwriting.
National Interstate is a subsidiary of Great American Insurance. “We are one of the three top-50 companies writing commercial auto liability that has maintained a combined ratio under 100,” Wiltgen said.
Industry statistics list Great American as the 19th-largest commercial auto insurer, with $511.2 million in written premiums and a 2018 combined ratio of 90.7 percent.
Lancer Insurance, which focuses on the bus and motorcoach industry and writes coverage for other customers, was ranked 37th among commercial auto insurers with $242.8 million in premiums. Its 2018 combined ratio was 106.6 percent, better than the industry average.
Low interest rates are reducing investment income earned by insurers, leaving them with less cushion to offset underwriting losses. Catastrophes such as hurricanes and wildfires are diminishing the reserves of the insurance industry as a whole.
Catastrophes suffered in 2018 led to $43 billion in losses, about one-fifth of which were incurred by commercial property, according to industry statistics. Hurricane Michael caused $2.9 billion in commercial property damage, and Hurricane Florence caused $1 billion in losses. Hurricanes and wildfires in 2017 resulted in nearly $100 billion in damages.
The economic realities of liability coverage have led insurers to increase their loss reserve funds. The commercial auto segment faced a reserve deficiency of $1.8 billion at the end of 2018.
Three of the largest “multi-line” insurers—American International Group, Progressive Corp. and Travelers Companies—added more than $1 billion combined to their reserves through the first three quarters of 2019, stated S&P Global Market Intelligence.
Some insurers have decided to exit the commercial auto market.
James River Group Holdings announced in October that it was dropping coverage for its largest client, the Uber ridesharing business. In a disclosure statement, James River said it withdrew $1.2 billion from an Uber collateral trust to cover current and future claims.
“This account has not met our expectations for profitability, and we think it best to terminate the underwriting relationship as of year-end,” said J. Adam Abram, chairman and chief executive officer of James River. He said the group still needs to process 18,500 Uber claims.
Personal injury awards are pushing insurance costs upward, Conning explained. “Crashes that only have property damage cost an average of $20,000, whereas third-party liability claims with fatalities average $4.8 million, according to the Federal Motor Carrier Safety Administration.”
Enormous jury awards in personal injury cases are increasing, said the Willis Towers Watson report. “The North American liability marketplace continues to be plagued by an unprecedented number of nuclear verdicts, and consequently high settlements, stemming from both conventional hazards (e.g., auto accidents) and unforeseen issues (e.g., #MeToo litigation), the opioid epidemic and California wildfire.
“The median settlement of the top 50 U.S. verdicts nearly doubled over the last four years ($54 million in 2018 vs. $28 million in 2014). A highly organized plaintiffs’ bar is using advanced litigation tactics, including reptile theory, to appeal to juror emotions, resulting in unprecedented liabilities for defendants.”
The Conning report agreed. “Elevated loss severity and frequency of severity continue to be among the most pressing concerns for commercial auto insurers. There have been numerous seven- and eight-figure court awards, which have fed plaintiff attorney interest in pursuing truck accident litigation. Increased attorney advertising and growth in litigation funding have also contributed to the rising loss severity trend.”
The Willis Towers Watson and Conning outlooks list several operational factors that are increasing the risks of commercial auto insurance.
- Driver shortage. Transportation operators, along with businesses in other industries, are relying on less-experienced workers who are prone to higher accident rates. Many truck companies have lowered hiring standards.
- Distracted driving. Willis Towers Watson placed the economic impact of distracted driving at $40 billion annually.
- Older commercial drivers who may possess reduced vision and slower information-processing skills.
- Driver health. The U.S. Centers for Disease Control has found that 69 percent of truck drivers are obese. Sleep apnea and sleep deprivation are increasingly cited as accident factors.
- The incidence of drunk driving has decreased in recent decades, but more drivers on the road are under the influence of marijuana.
- More traffic and congestion
- Deteriorating roads and bridges
What to do?
“Liability insurers are demonstrating discipline by raising rates and hedging their bets by deploying much lower limits on any one risk,” Willis Towers Watson predicted.
How might carriers protect their coverage and minimize the costs?
“Operators should be preparing themselves for what is happening in the insurance industry and will continue well into 2020,” Wiltgen said.
“My suggestion would be to talk with their insurance brokers early and make sure they have a sense for what their insurance companies are doing and how their broker is helping them as their trusted advisor. Controlling losses and being diligent in their hiring practices will go a long way in helping them at their insurance renewals.”