Commercial Auto Progress Uneven: Premiums Grow, So Do Losses

The Insurance Services Office, Inc.'sanalysis of recent developments confirms a progressive firming ofcommercial auto insurance rates in the U.S. property-casualtymarket, but it's too early to break out the champagne.

The recent health of the commercial auto insurance market mightcause insurers to wait a while before celebrating. Consider:

The industry's combined ratio for commercial auto liability andphysical damage was 115.7 in 2000. That is, insurers lost almost 16cents on every dollar in premium for commercial auto, before takinginvestment gains into account.

The industry's operating ratio for commercial auto was 106.5percent in 2000. Insurers lost nearly 7 cents on every dollar inpremium for commercial auto, after taking investment gains intoaccount.

The industry's operating ratio for commercial auto was 98.6percent in 1995. Each year from 1996 to 2000, the industry'soperating ratio for the line exceeded 100 percent.

The bottom line? Including investment gains,insurers lost an average of just over 4 cents on every dollar ofcommercial auto premium during the past five years.

ISO MarketWatch, an analytical tool for measuring market pricechanges, shows that commercial auto insurance rates on renewalsbegan moving up in 1999 and continued to rise at a progressivelyfaster pace through the end of 2000, when rates on renewals were upabout 10 percent for liability and 8 percent for physicaldamage.

While agent surveys and earnings reports from individualinsurers indicate that price increases for commercial lines havecontinued accelerating thus far into 2001, and while some industryexperts project rate increases extending into 2002 and perhapsbeyond, such information is too vague and too spotty for targetingspecific segments of the commercial auto market.

It's anybody's guess how long the commercial auto market willcontinue to firm or how high rates will go before the market soursagain.

Though the price increases to date are encouraging, it's toosoon to proclaim that insurers are out of the woods. The industry'soperating ratio improved from 108.8 percent in 1999 to 106.5percent last year, but the industry is still a long way away fromshowing a profit on commercial auto.

So far, price increases are only beginning to offset price cutsduring the last soft market. On average countrywide, rates onrenewals for commercial auto liability in 2000 were only 3 percentabove those charged in 1995. For physical damage, rates on renewalsin 2000 were still a bit below 1995 levels.

But the consumer price index rose a total of 13 percent from1995 to 2000. Based on ISO statistical data, the severity oftypical commercial auto physical damage losses for policies withthe standard $250 deductible rose roughly in line with the CPI. Theseverity of liability of losses climbed far more rapidly during theperiod, with the severity of commercial auto property damageliability losses increasing 28.9 percent.

Industry net commercial auto incurred loss and loss adjustmentexpenses increased at a 5.2 percent clip in 2000. Net premiumsearned rose 7.8 percent.

If those trends continue, it could take until 2003 for theindustry to show a profit after investment gains on commercialauto. And, if anything causes premium growth to fall short ofgrowth in losses, the line's return to profitability could bedelayed or even precluded.

History teaches that each improvement in industry resultsthreatens to trigger a competitive binge, bringing on the next softmarket for commercial auto insurance. ISO Fast Track data showsthat the loss ratio for commercial auto liability for the twelvemonths ending March 31, 2001 had improved by about 1 point comparedwith what it was a year ago. The loss ratio for commercial autophysical damage had improved by nearly 3 points for the sameperiods.

For now, this data and ISO MarketWatch information about ratechanges on renewals suggest commercial auto is inching its way backto profitability.

What's an insurer to do?

To write business profitably, insurers need solid marketinformation by subline, class and location.

According to ISO MarketWatch, price changeshave varied substantially by state and by class of commercial autorisks. The wide-ranging variations in market conditions signalpotential changes in profitability as written premiums based on newrates translate into earned premiums. For example:

Across the states, full-year 2000 rate changes on renewals forcommercial auto liability averaged nearly 7 percent. But rates onrenewals in Hawaii were virtually unchanged, and rates on renewalsin California and Texas rose about 4 percent, while rates in Maineclimbed more than 10 percent.

Rates in 17 states rose at least 8 percent, while rates in sevenstates rose less than 5 percent. (See accompanying chart.)

Similarly, across the states, full-year 2000 changes incommercial auto physical damage rates averaged about 5.5 percent.But rates on renewals in New York and Hawaii were practicallyunchanged, while rates in Idaho and Michigan jumped more than 10percent.

Physical damage rates in ten states rose more than 8 percent,but rates in five states rose less than 3 percent.

Turning to rate changes by class, for commercial auto liability,full-year 2000 countrywide rate changes on renewal ranged from justover 5 percent (for public autos) to just over 7 percent (forcommercial trucks). For physical damage, changes ranged from 4percent (for private passenger-type vehicles) to 6 percent (forcommercial trucks). But close analysis of ISO MarketWatch datareveals substantial variation in rate changes, for both theliability and physical damage sublines, by class and by state.

For liability, rates on renewals for commercial trucks were upover 9 percent in 2000 in 11 states, but less than 5 percent infive states, while rates on renewals for private passenger typeswere up between 8 and 9 percent in 10 states but less than 3percent in five.

Rates increased the most for both commercial trucks and privatepassenger types in Colorado, Delaware, Oklahoma, New Jersey andIllinois, while rates for both major classes rose the least inHawaii and Texas.

For physical damage, rates on renewals for commercial truckswere up over 9 percent in 2000 in 5 states, but rose less than 5percent in 13 states. Rates on renewals for private passenger typeswere up between 8 and 10 percent in 5 states but less than 1percent in six.

Rates increased the most for both commercial trucks and privatepassenger types in Michigan, Idaho, and Wisconsin, while rates forboth major classes rose the least in Hawaii, Oklahoma, New York andCalifornia.

In 2000, rates on renewals for liability insurance forcommercial trucks were below 1995 levels in six states, a starkcontrast to the cumulative 15-to-20 percent increases in the sixstates with the most positive changes in rates. For privatepassenger types, rates for liability insurance in 26 states in 2000were below what they were in 1995, but in five states were between10 and 20 percent higher.

In 2000, physical damage rates on renewals for commercial truckswere below 1995 levels in 22 states, while the three states withthe most positive change in rates had cumulative 18 to 25 percentincreases. For private passenger types, rates for physical damageinsurance in 42 states were below what they were in 1995, but were16 to 17 percent higher in two states.

Renewal prices jumped substantially more in 2000 for fleetbusiness than for the non-fleet business.

For example, liability rates for commercial trucks with localand intermediate ranges of operation increased more than 9 percentfor fleet business, compared with 4 percent for non-fleetbusiness.

The difference was even more pronounced for long-haul trucks.For that class, rates for fleets increased almost 15 percent, whilerates for non-fleet business rose just 5 percent.

What does this all mean for insurers that are seeking to targetmarkets rich in opportunities?

Overall pricing trends are currently favorable, but will therising tide lift all boats to a profitable level?

Crosscurrents may capsize ill-conceived, shotgun approaches tothe market.

Insurers intent on achieving profitable growth need reliableinformation, spanning a range of subjects, to identify promisingmarkets. The subjects include market conditions, historical lossexperience, and prospective trends, each of which may varysignificantly by state and class of business.

Insurers intent on wringing profitable growth from commercialauto insurance markets need to start with reliable information, anda solid, empirical understanding of the market and its nuances.

Only by combining that strong foundation with knowledge of one'sstrengths and weaknesses versus the competition and other analysescan an insurer hope to carve out profitable niches.

John J. Kollar is Vice President Consulting and Research forInsurance Services Office, Inc. in Jersey City, N.J.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 3, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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