While the story for commercial lines in general continues to include overall softening conditions as excess capital and capacity drive competition, Commercial Auto/Trucking is heading in the opposite direction, with some companies exiting parts of the market and rates generally on the rise.
The need for harder market conditions in Commercial Auto — particularly within certain segments — has been recognized for a few years, even if the timing was in doubt.
In 2014, during a conference call to discuss Q1 results that year, W. Robert Berkley, then-COO and current CEO and president of W.R. Berkley Corp., called the Commercial Transportation segment “a great puzzle” and noted the line had long seemed ripe for a hardening that hadn't come. That same year, Fitch Ratings noted price deterioration prior to 2011, combined with an erosion of underwriting standards, had led to underwriting losses and unfavorable reserve development. A recent Insurance Information Institute (I.I.I.) chart illustrates that the combined ratio for Commercial Auto crossed the 100 mark in 2011, and remained there through 2014 after eight straight years of combined ratios lower than 100.
Experts recognize that the current hardening was a long time in coming. Nationwide's Paul Farrell, senior consultant, Business Auto, says rates had been “too squishy for too long. There's been such competitiveness that it's got to have a little bit of a rebound.”
“That line got pretty severely underpriced about five to eight years ago, and they’re just catching up to it,” says James Lynch, director, Information Services and chief actuary for I.I.I. “They figured it out about two or three years ago as claims started rolling in from those older years, and they’ve been responding as a result.”
Mark Plousis, vice president of Underwriting for Philadelphia Insurance Cos., says his company recognized the trends about 36 months ago and began adjusting — weeding out poor performers, filing for rate increases where necessary, implementing loss-control measures and taking a state-by-state approach to underwriting the line.
“Our book is better now because of what we’ve done,” he says. “Unfortunately,” he adds, “the losses coming in now are probably from accounts that have been off the books, but we feel that our in-force book is in a better position than it was previously because we did recognize the trends and implemented action plans.”
The claims picture darkens
Competitive pricing alone did not cause the shift to a harder market: Experts largely point to increasing claim severity as well, driven by a variety of factors. “Loss costs have risen very dramatically with Auto,” says Plousis. “The inflationary issues that come along with claim payments and claims expenses and litigation have risen drastically.”
For claim expenses, medical costs are certainly a significant contributor, but plenty of insurance lines are subject to medical cost inflation. What makes Commercial Auto unique?
For one thing, the persistence of the injuries tends to be a little longer, says Farrell. On average, claim duration is longer from a car or truck crash, with more lost days than on an average Workers’ Comp claim, for example.
Experts point to other factors increasing the severity and even frequency of claim incidents (Willis Towers Watson's Spring 2016 “Marketplace Realities” report cites both higher frequency and severity), such as increased activity on the roads, distracted driving and the nation's aging infrastructure.
Apart from liability, the cost of vehicle repairs also has risen. Farrell says more vehicles than ever before are being totaled as designs are altered to meet fuel and weight standards.
In terms of litigation trends, Craig Dancer, Transportation practice leader for Marsh, points out some factors that separate trucking from many insurance lines. “We’ve found that plaintiffs’ bars are very active,” he says. “They’ve created sort of a cottage industry in going after truckers.”
In claims involving a for-hire motor carrier and, say, a passenger vehicle, Dancer says it's not too difficult for a plaintiff's attorney to build a case against the for-hire carrier. Attorneys have access to all sorts of data on commercial fleets — such as information available from the Federal Motor Carrier Safety Administration — that they can use to see how an individual carrier ranks against peer groups. “It becomes quite easy for a plaintiff's attorney to say, ‘Look, this guy wasn't following safety protocols correctly,’ or, ‘He wasn't fit to drive.’”
Plousis says state laws also complicate the Commercial Auto landscape, noting that in no-fault states such as New York, Pennsylvania, New Jersey and Florida, a Commercial Auto insurer has to pay medical bills along with potential bodily injury claims, “so you’re getting double-hit in those states. There are times in some states where it's like dancing in a minefield. No matter what you do, it's a difficult task.”
Farrell likewise talks about “bizarre jurisdictional scenarios” in some states that complicate Commercial Auto liability claims. With joint and several liability rules in some states, he notes, another party in a claim could have been drunk and caused a crash by running a stop sign, but if the insured commercial driver was going five miles per hour over the speed limit and is found 1% negligent, that insured could end up paying the entire claim.
It all adds up to a market that has become more difficult for insurers, and has become a universal issue. “I read a lot of competitors’ reports — annual reports and quarterly reports — and they’re all taking about the same drastic increase in severity for auto-related claims,” Plousis says.
Lynch notes that major carriers’ financial hits in this line over the past two years have progressed to the point at which they have specifically referenced Commercial Auto in earnings reports and conference calls. AIG, for example, mentioned higher Commercial Auto losses as one reason for its higher 2015 Q3 accident year loss ratio. That same quarter, Zurich Insurance Group pointed to U.S. Auto liability as a reason for weaker-than-expected profitability in its General Insurance business.
Willis Towers Watson says notable insurers have been restricting their appetite for Commercial Auto liability and looking for double-digit rate increases for risks with poor loss experience.
Plousis says he's seen some competitors leaving the market entirely. “There have been people entering,” he notes, “but not at the rate people have been exiting.”
Rebecca Roberts, managing director for Burns & Wilcox's Indianapolis location, also says she is seeing standard carriers pull back a bit in the past few years, creating opportunities in the Excess & Surplus lines space. “When I speak to that, I refer to heavier classes of vehicles,” she notes. “Standard [carriers] have a lot better luck with lighter trucks.”
The issue for some insureds then becomes whether they can afford the deep expertise delivered by the E&S market. If their premiums go up too sharply, it is tough for them to stay in business, says Roberts, “and I’m shocked at how many conversations like that we’ve had in the last year.”
Timothy H. Delaney, senior vice president, Passenger Transportation at Lancer Insurance Co., says the market is perhaps a bit more nuanced these days. Of carrier appetite, he says: “There is plenty of competition, but generally at higher rates than insureds were paying five to six years ago.”
Managing rates for clients
The tougher landscape complicates what is already a challenging line. “Commercial Auto” covers a wide range of vehicles and uses, and each segment comes with its own risks and carrier appetite.
“Auto is especially tricky because the exposure range is so great,” says Farrell. “There's a certain finesse in underwriting required, and it ranges.”
At one end, he explains, there is trucking, with fleets of 50 tractor trailers operating out of multiple terminals across state lines and complying with federal regulations. At the other end, there could be a (non-owned) fleet of three pizza delivery vehicles for which the insurer intends to be the excess writer, with the individual pizza delivery personnel carrying their own insurance. Yet sometimes the insurer can end up as the primary because it never asked if the drivers have insurance, or if there is a business exclusion on the personal policy.
Experts point to increasing rates in nearly all Commercial Auto segments — but Marsh's Dancer says trucking is seeing particularly severe tightening in the current market, with long over-the-road tour operators experiencing similar conditions. He says some trucking companies are looking into alternative risk transfer methods, such as forming group captives, as they see their premiums rise.
Dancer says Marsh emphasizes safety and claim management for the captives it manages, but he says the members themselves play a large role in enforcing that mindset. They scrutinize each other's loss experience and try to identify any negative trends. “They’re looking at it month-to-month rather than once a year” like a traditional underwriter, he adds.
Dancer notes there is no one solution for everyone when it comes to managing the higher cost of insurance, “but you have to be in position to get creative.” From a broker standpoint, he says Marsh is making sure its people start conversations with transportation accounts earlier to educate them about the marketplace and the type of renewal they are going to have. In the current rate environment, he adds, “It is a challenging discussion to have.”
Daniel Bancroft, Transportation practice leader at Willis Towers Watson, says there are things trucking operations can do to manage premiums. He agrees that rates are on the rise, but says motor carriers that are very safe and have good Compliance, Safety, Accountability scores from the Federal Motor Carrier Safety Administration are finding renewals that are consistent.
Bancroft says fleets should look to adopt advanced technology such as telematics and drive cams to improve driver safety. Companies that do so, he says, are seeing dramatic reductions in frequency and severity.
Farrell says Nationwide does factor safety measures such as the use of technology into its underwriting, but he says underwriters have to be careful not to issue a “seal of approval” just because a company invested in telematics. “That factor alone is not a compelling reason to say they have it all figured it out,” he adds. The data has to be carried back to the driver to actually modify his or her behavior.
Roberts notes that a focus on driver safety has more value than just managing insurance premiums. For large, federally regulated fleets, the Federal Motor Carrier Safety Administration can shut them down if the operation is deemed unsafe.
Cameras are also of help to insurers during the claims process. “There has been a push to have cameras in the vehicle to record the situation around an accident,” she notes. “Sometimes it helps us and sometimes it hurts us, but either way we know exactly what happens in the accident. If we were at fault, we can come to an agreement faster as opposed to disputing what led up to the claim.”