Commercial Auto Line Improvement May Falter

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 regained traction after 16 years of profitless business, but the sector is likely to stall out again this year, a study has found.[@@]

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

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

Conning's study also found that insurers did better providing the coverage in the New England area and for certain industries.

According to Conning figures, the commercial auto 1999 combined ratio of 117.8 improved dramatically in 2003 to 95. The study noted that 2003 marked the first time in 16 years that the insurance industry earned a profit from commercial automobile underwriting.

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

The Conning Research study explores premium rate changes, loss severity, and other factors that have driven the positive underwriting results and the underlying trends indicating a likely deterioration in the loss ratios into 2005 and 2006.

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

"All key insurer groups--automobile specialists, generalists, and large, medium, and small insurer groups, as defined by premium size--have recorded rapid underwriting improvements," said Stephan Christiansen, research director at Conning Research and Consulting.

But Mr. Christiansen said there are "significant differences in profitability by region and business sector. Understanding and exploiting these differences can help companies position themselves to achieve superior results despite a return to a more difficult market."

Mr. Harris said one of the regions that historically performed very well is the New England region. For commercial, auto that area recorded pure loss ratios smaller than the national average for five of the past five years, he said.

Among the nation's U.S. Census regions, Mr. Harris said, "That region is the best." Looking at the overall weighted average, total direct premiums earned and total direct losses, the pure loss national average for 1999 to 2003 was 69.5; New England was 62.3."

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

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

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

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

He said Conning had monitored a decrease in the per-claim loss severity. "That changed in 2003 loss data and we saw a trend moving back to a larger per-claim loss starting in 2003. We're watching medical costs increase and automobile repair costs increase. Those factors likely will be contributing to the loss severity."

Mr. Harris said it is anticipated that continuing into 2005 and 2006 those factors will pressure profitability.

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