Commercial Auto Suffers First Underwriting Loss in 8 Years

The Commercial Auto segment recorded its first underwriting loss in eight years in 2011 due to a combination of declining premiums, increasing claims severity and a reduction in favorable prior-year reserve releases, a new report reveals.

In its “Commercial Auto Market Update,” Fitch Ratings says the line posted a combined ratio of 103.6 in 2011. Fitch says that on an accident-year basis and examining only liability for Commercial Auto, the underwriting losses began in 2009.

Net written premiums in 2011 were around $21 billion—21 percent lower than the line's peak level in 2006. “This decline is attributable to years of declining premium-rate trends in a competitive market environment, as well as reductions in insured exposures as Commercial Auto was significantly affected by the economic recession,” says Fitch.

In addition to fewer premium dollars coming in, Fitch says the Commercial Auto segment is also seeing a decline in favorable reserve development.

While Fitch says Commercial Auto insurers have reported “significantly favorable” reserve development for the past seven years, the ratings agency notes that favorable development was less pronounced in 2011 and is expected to decline further going forward “as a review of recent accident-year reserve experience reveals somewhat less-conservative Commercial Auto reserving.”

Still, despite the headwinds, Fitch says the market fundamentals in Commercial Auto are improving. “The market has responded to this weaker underwriting performance as evidenced by premium rate increases that started in the second half of 2011,” the report states.

Fitch expects those rate increases to continue into 2013 but notes that these increases will need to outpace growing loss costs: “Commercial Auto is affected by similar loss factors as Personal Auto. Most recently, bodily injury claims inflation has affected automobile lines.”

Even so, Fitch says it expects Commercial Auto to return to underwriting profitability in 2013, if not boasting the low-90s combined ratios achieved in 2004 and 2005.