Commercial Auto Progress Uneven: Premiums Grow, So Do Losses

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

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

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

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

The industry's operating ratio for commercial auto was 98.6 percent in 1995. Each year from 1996 to 2000, the industry's operating 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 of commercial auto premium during the past five years.

ISO MarketWatch, an analytical tool for measuring market price changes, shows that commercial auto insurance rates on renewals began moving up in 1999 and continued to rise at a progressively faster pace through the end of 2000, when rates on renewals were up about 10 percent for liability and 8 percent for physical damage.

While agent surveys and earnings reports from individual insurers indicate that price increases for commercial lines have continued accelerating thus far into 2001, and while some industry experts project rate increases extending into 2002 and perhaps beyond, such information is too vague and too spotty for targeting specific segments of the commercial auto market.

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

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

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

But the consumer price index rose a total of 13 percent from 1995 to 2000. Based on ISO statistical data, the severity of typical commercial auto physical damage losses for policies with the standard $250 deductible rose roughly in line with the CPI. The severity of liability of losses climbed far more rapidly during the period, with the severity of commercial auto property damage liability losses increasing 28.9 percent.

Industry net commercial auto incurred loss and loss adjustment expenses increased at a 5.2 percent clip in 2000. Net premiums earned rose 7.8 percent.

If those trends continue, it could take until 2003 for the industry to show a profit after investment gains on commercial auto. And, if anything causes premium growth to fall short of growth in losses, the line's return to profitability could be delayed or even precluded.

History teaches that each improvement in industry results threatens to trigger a competitive binge, bringing on the next soft market for commercial auto insurance. ISO Fast Track data shows that the loss ratio for commercial auto liability for the twelve months ending March 31, 2001 had improved by about 1 point compared with what it was a year ago. The loss ratio for commercial auto physical damage had improved by nearly 3 points for the same periods.

For now, this data and ISO MarketWatch information about rate changes on renewals suggest commercial auto is inching its way back to profitability.

What's an insurer to do?

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

According to ISO MarketWatch, price changes have varied substantially by state and by class of commercial auto risks. The wide-ranging variations in market conditions signal potential changes in profitability as written premiums based on new rates translate into earned premiums. For example:

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

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

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

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 just over 5 percent (for public autos) to just over 7 percent (for commercial trucks). For physical damage, changes ranged from 4 percent (for private passenger-type vehicles) to 6 percent (for commercial trucks). But close analysis of ISO MarketWatch data reveals substantial variation in rate changes, for both the liability and physical damage sublines, by class and by state.

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

Rates increased the most for both commercial trucks and private passenger types in Colorado, Delaware, Oklahoma, New Jersey and Illinois, while rates for both major classes rose the least in Hawaii and Texas.

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

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

In 2000, rates on renewals for liability insurance for commercial trucks were below 1995 levels in six states, a stark contrast to the cumulative 15-to-20 percent increases in the six states with the most positive changes in rates. For private passenger types, rates for liability insurance in 26 states in 2000 were below what they were in 1995, but in five states were between 10 and 20 percent higher.

In 2000, physical damage rates on renewals for commercial trucks were below 1995 levels in 22 states, while the three states with the most positive change in rates had cumulative 18 to 25 percent increases. For private passenger types, rates for physical damage insurance in 42 states were below what they were in 1995, but were 16 to 17 percent higher in two states.

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

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

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

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

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

Crosscurrents may capsize ill-conceived, shotgun approaches to the market.

Insurers intent on achieving profitable growth need reliable information, spanning a range of subjects, to identify promising markets. The subjects include market conditions, historical loss experience, and prospective trends, each of which may vary significantly by state and class of business.

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

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

John J. Kollar is Vice President Consulting and Research for Insurance 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Commercial Auto Progress Uneven: Premiums Grow, So Do Losses

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