Commercial Auto Line Improvement May Falter

By Daniel Hays

NU Online News Service, Jan. 13, 3:58 p.m.EST?Commercial auto insurance results have regainedtraction after 16 years of profitless business, but the sector islikely to stall out again this year, a study has found.[@@]

Hartford, Conn.-based Conning Research said the sector has beenmoving in the right direction from 1999 to 2003, in a study titled,"Commercial Automobile Markets: Solid Sectors, Worthy Gambles, andRisky Business."

The prediction for a coming slump in profitability wasattributed to higher costs for injury treatment and auto repair aswell as slumping prices.

Conning's study also found that insurers did better providingthe coverage in the New England area and for certainindustries.

According to Conning figures, the commercial auto 1999 combinedratio of 117.8 improved dramatically in 2003 to 95. The study notedthat 2003 marked the first time in 16 years that the insuranceindustry earned a profit from commercial automobileunderwriting.

"The speed of the turnaround in commercial auto surprised manyindustry observers and even industry insiders," said Clint Harris,analyst at Conning Research and Consulting. "Our analysis indicatesthat the positive results were widespread, but the recovery isunlikely to continue into 2005 and 2006 for the total industry.Therefore, insurers seeking underwriting profit will need tooutperform their competitors."

The Conning Research study explores premium rate changes, lossseverity, and other factors that have driven the positiveunderwriting results and the underlying trends indicating a likelydeterioration in the loss ratios into 2005 and 2006.

Researchers analyzed differences in results by region and bybusiness class to develop examples of segmentation strategies thatare more likely to lead to superior results.

"All key insurer groups--automobile specialists, generalists,and large, medium, and small insurer groups, as defined by premiumsize--have recorded rapid underwriting improvements," said StephanChristiansen, research director at Conning Research andConsulting.

But Mr. Christiansen said there are "significant differences inprofitability by region and business sector. Understanding andexploiting these differences can help companies position themselvesto achieve superior results despite a return to a more difficultmarket."

Mr. Harris said one of the regions that historically performedvery well is the New England region. For commercial, auto that arearecorded pure loss ratios smaller than the national average forfive of the past five years, he said.

Among the nation's U.S. Census regions, Mr. Harris said, "Thatregion is the best." Looking at the overall weighted average, totaldirect premiums earned and total direct losses, the pure lossnational average for 1999 to 2003 was 69.5; New England was62.3."

By contrast, in the West south central region, 75.9 was theaverage from 1999 to 2003.

By business sector, the study found the mean average loss ratioin 2002 and 2003 was lowest for finance, insurance and real estateindustries with a 37 pure loss ratio. The highest loss ratios werefound in transportation, communications and utilities business at amean average of 80.

Mr. Harris said the likelihood of a profit slowdown this year isshown by various trends.

"Premium rates started going down at the end of 2004 in the lastquarter. Anecdotally we hear the commercial auto premium rates arefalling farther and discounts are growing for renewals. That's adriving factor that limits growth?and it has a negative impact onthe profitability."

He said Conning had monitored a decrease in the per-claim lossseverity. "That changed in 2003 loss data and we saw a trend movingback to a larger per-claim loss starting in 2003. We're watchingmedical costs increase and automobile repair costs increase. Thosefactors likely will be contributing to the loss severity."

Mr. Harris said it is anticipated that continuing into 2005 and2006 those factors will pressure profitability.

The study also analyzes risk exposure growth and premium rategrowth. The study titled, "Commercial Automobile Markets: SolidSectors, Worthy Gambles, and Risky Business" is available forpurchase from Conning Research & Consulting, Inc., by calling(888) 707-1177 or visiting the company's Web site at www.conningresearch.com. Thecost is $1,750.