The Auto market is looking to enter 2015 on cruise control,which is not necessarily the best news. Pricing remains relativelyflat, the chances of negotiating rate cuts are slim, claimsseverity is increasing on certain fronts, additional competition isentering the market, and the need to underwrite risks carefully ismore important than ever. Still, promising new developments on theclaims management front, especially with new federal driverregulations and the rising use of telematics, offer a tantalizingglimpse into a market environment that could provide some seriousmileage for those who are best suited to take advantage of it.

According to Daniel E. Aronson, New York-based managing directorand the U.S. primary casualty placement leader at Marsh USA,Commercial Auto insurers are engaging in significantly differentunderwriting with every account because the market's experience isnot as strong as it is in other casualty lines.

“The issue is differentiation of risk,” notes Aronson, whocharacterizes the Commercial Auto insurance rate environment asfairly stable. Rates, on average, are flat to a couple ofpercentage points higher. Most risks can expect favorable renewals,while problem accounts may see high single-digit rate hikes atworst.

Broker executive Matt Payne, a Kansas City, Mo.-based seniorvice president and the transportation unit manager at Lockton Cos.Inc., says accounts with poor experience should expect rateincreases of about 5%-7%. Otherwise, rates are flat to no more than5% higher for accounts that are neither perfect nor performingpoorly. That's softer than during the past year or two, becauseinsurers have been profitable during that period, even though theirclaims experience has not been stellar.

Michael Miller, the Cleveland-based director of regionalmarketing at Progressive Insurance, foresees problems forindependent, single-truck owners and operators. He says someinsurers are pulling back their capacity for those risks, includingdirt and gravel haulers, while other insurers are boosting ratesaround 10%. Miller expects that dynamic to continue for the nextyear.

Businesses and contractors can expect to see rate hikes of 5% orlower over the past year, Miller says, thanks to new players fromthe Property market, which is even softer than Commercial Auto.These newcomers are looking to deploy their unused capital byoffering Auto coverage to their Property accounts in a packagepolicy.

While Auto insurers are committed to responsibly underwritingaccounts, some risks that decide to market their businesses mightgenerate some competition if their loss histories are good and ifthey have outstanding loss controls in place, market executivesnote.

ACCOUNT AND INDUSTRY-SEGMENT LOSSES

With Auto insurers looking for ways to use their capital, whyaren't they competing on every account, which typically leads toheated competition and lower rates, even for risks with spottyexperience?

Insurers have little opportunity to generate significantinvestment income, so they must address account andindustry-segment losses through underwriting, market executivesexplain.

Auto insurers face claim-frequency and severity issues in somesegments of their portfolios, especially long-haul trucking andlarge fleets, market executives say.

Insurers are suffering a modest deterioration in both frequencyand severity experience, says Benedikt Sander, a Boston-basedsenior vice president and the product manager for Commercial Autoand Commercial Multi-perils for Liberty Mutual. The improvingeconomy is driving up frequency, as improved business conditionshave led to more vehicles on the road and more opportunities foraccidents.

Medical care inflation is the root cause of the increase inseverity, he says. A recent reduction in the medical inflation ratecertainly helps insurers, but that rate remains higher than thegeneral inflation rate, Sander says.

The year-to-date health care inflation rate is 2%, which isconsiderably lower than the long-term average of 5.47%, accordingto YCharts.com, a research and financial analytics website. Yet, itstill exceeds the U.S. Personal Consumption Expenditure Inflationrate of 1.04% for the first 10 months of 2014 and the long-termaverage of 3.44%.

Meanwhile, vehicle damage claim severity has been rising forindependent truckers, because those small outfits are operatingolder trucks with higher replacement costs for spare parts.

Some claims severity issues also can be traced to large juryverdicts, Payne says.

LOSS MITIGATION

At most Auto insurers “we're seeing frequency decreases,” Paynesays. Much of that is attributable to improved technology,including rearview monitors in the driver's cabin, lane-changingdevices that alert drivers when vehicles are in blind spots, andsafe-distance technology that triggers the vehicle's braking systemif the driver is following another vehicle too closely.

In addition, a couple of factors have reduced accidentsattributable to driver fatigue, Payne says. One is the new federalregulation limiting the number of hours that drivers can be on theroad. The other is that many trucking companies have been earlyadopters of electronic driver login technology, which makesskirting those regulations nearly impossible, Payne says.

Commercial insurers, however, are still trying to determine howto incorporate telematics—driver behavioral information that can betransmitted directly to insurers from devices built into thevehicles—into their underwriting, Sander notes. This will likelyincrease during the next 10 years, especially in Personal Auto, butfor now, the limitations are pricing and as-yet unansweredquestions on the type of information that should be evaluated, howoften the data should be transmitted and on the data'sevaluation.