Ask participants in the Commercial Auto market to characterize the current state of that line and they’re likely to respond with one word: “Challenging.” They cite highly competitive pricing, more distracted driving and increasing frequency and severity of medical claims for current market conditions.
“You have an increase in miles driven, and that's been a trend over recent years,” says Tony Fenton, vice president, commercial lines underwriting, Middle Market & Segments, with Nationwide Insurance. “You have a phenomenon of distracted driving pushing into the behavior on the road and, then, also some medical cost inflation continuing to push forward.”
It's also a “highly unpredictable” market from a business perspective, says Steve Shepard, transportation underwriting manager with Burns & Wilcox in Indianapolis, Ind. A few years ago, Shepard says, he could look at a piece of business and provide a realistic estimate of the coverage pricing, but it's very difficult to do that now. “You can take what you would think would be two very similar risks on paper, but if you put them both into the same system, you can come out with drastic differences on rate,” he adds.
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Moving in and out of markets
The variations are caused partly by carriers’ decisions to move in and out of specific markets or restrict their underwriting of specific classes with little or no notice. Shepard cites Progressive Insurance's September 2016 decision to pull out of the tow truck sector: Other companies moved to pick up the business, but conditions changed again with Progressive's subsequent re-entry. “Progressive has entered back into tow trucks but Progressive being the large writer that they are, it really made the marketplace very unpredictable and very reactionary in that case,” says Shepard.
Carriers are taking a “laser” approach to their portfolios, according to Ken Riegler, leader of both the North American Distribution and Network team and the North America Primary Casualty team for XL Catlin. By closely monitoring their loss activity in specific business lines, carriers can manage their risk exposures more precisely. “So, they may steer away from the long-haul trucking accounts,” says Riegler. “Or they may steer away from the waste haulers. [It's] all dependent upon their risk tolerance of their overall portfolio and how they feel they can bring their capacity to market in a very competitive way.”
Just how bad is the Commercial Auto market? Since 2011, the industry's net combined ratio has been over 100%, reaching a whopping 110% in 2016. Higher rates can help offset losses, but a competitive market constrains rate hikes. The IVANS Index showed that the average premium renewal rate change was 2.64% for the first six months of 2017, although some states such as Florida had larger increases.
Rates are playing catch-up and are likely to continue to do so for the foreseeable future, says Mark Plousis, vice president, Commercial Auto underwriting with Philadelphia Insurance Cos. in Bala Cynwyd, Pa. Increased accident frequency due to higher traffic congestion and medical-cost liability severity are the primary cost drivers. “When someone has an auto accident and they’re injured, the treatments are very, very expensive — medical costs, medical tests,” he says. “As they continue to rise, that directly reflects on the cost of an accident.” His company's rate increases have been in the 3% to 5% range consistently for the last 36 months or so, he adds.
The quote process has changed, as well, says Shepard: “I can remember up to three years ago I had companies that it was an automatic 15% or 10% renewal credit based on your loss history for that year or while you’ve been insured with that company. That's gone now, in most cases.
Keeping eyes on the road
Distracted driving remains a growing problem. According to the National Highway Traffic Safety Administration, in 2015 3,477 people were killed, and 391,000 were injured in motor vehicle crashes involving distracted drivers. An estimated 660,000 drivers are using cell phones while driving during daylight hours. Local regulations are the first line of defense against distracted driving; Plousis reports that more states are enacting laws against distracted driving and police are enforcing the laws more aggressively. As drivers realize that violations will result in fines, inconvenience and possible problems with their licenses, the laws will act as a deterrent, he believes.
Telematics offers another potential route to reducing driver distraction, and sensors can provide a range of useful data on the driver's and the vehicle's behavior. As the costs of monitoring systems fall, telematics use is increasing, Plousis says. In addition to tracking driver behavior, the systems’ benefits include improved monitoring of vehicles’ performance and condition while geo-fencing can ensure that the vehicle stays on its intended route. These outcomes can directly influence insurance premiums.
“If they institute these telematics programs and they’re successful, then the loss history for the entity will be positive and most insurance rates are based off experience rating,” Plousis explains. “So, if their experience is successful, then they’ll have better pricing.”
Ironically, the same technology that can lead to lower rates is accelerating the costs of accident repairs. Minor fender-benders that cost $500 to repair are a thing of the past, Fenton notes. Depending on the technology damaged in the vehicles, accidents that would have incurred $500 repair costs in the past can now run into the thousands.
Telematics can improve driver and vehicle safety and efficiency, but Riegler believes there are limits to those improvements. “No matter what technology you have onboard from a telematics perspective, unless we’re in a perfect world where autonomous vehicles are running smoothly and you’re taking away the human element, you’re going to end up with accidents,” he cautions.
The possibility of autonomous or semi-autonomous commercial vehicles is gaining acceptance, although some consider its implementation unlikely in the near future. Still, news reports from the Automated Vehicles Symposium in San Francisco this past July indicated that autonomous trucks could be on the road within three years or so. Truck manufacturers like Daimler Trucks and Volvo Group are working on these technologies; U.S. Xpress is also actively investigating the use of autonomous trucks.
Carriers and technology
Insurers are getting involved, too. XL Catlin has formed a partnership with Oxbotica, a spin-out from Oxford University's Mobile Robotics Group, “to support the adoption of mobile robot solutions and explore their impact on risk management and insurance solutions,” according to the organizations’ joint press release.
Loss-control consulting is another effort by carriers to reduce claims. Fenton explains that Nationwide works with its insureds to improve the quality of driver hiring and training. Steps can include reviewing driver safety training, distracted driving policies and accident reporting procedures, for example. The goal is to “educate as well as help evaluate any other tactics that an insured could deploy to be even a better risk or a stronger risk into the future,” says Fenton.
Working to effect regulatory changes on the regional and state level is another approach. Plousis points out that some states provide better risk management conditions than others, citing the variation in states’ percentages of insured versus uninsured drivers.
In Oklahoma, for instance, roughly 1 in 3 drivers is uninsured, versus 3% uninsured in Massachusetts. The presence of no-fault insurance is another factor, he says: “The loss costs for bodily injury claims are greatly higher in no-fault states than they are in non-no-fault states, so that's something that has to be analyzed on a state-by-state basis.”
The road ahead
Meanwhile, market experts in this line don't see any quick or easy remedies for Commercial Auto's challenging environment. Riegler believes the industry as a whole will continue to see a level of competition that generates losses. Additionally, the competitive landscape will remain in flux, Shepard maintains. He says carriers will believe their algorithms have figured out a market segment and they will enter it aggressively by undercutting prices to buy business.
After a few years, however, the newcomers’ tail losses — unpredicted, outsized payouts — likely will cause them to drop out of the market, at least temporarily.
Whether new entrants stick around or not, it will take time for Commercial Auto to regain its footing, Shepard argues: “Any changes that are made today or in the next few years, it's going to be a slow methodical improvement from a loss perspective because when you’re dealing with Commercial Auto, specifically liability, there is a long tail on a claim or the potential for a claim.”