COMMERCIAL AUTO INSURANCE

Will a leader to a hard market
be a laggard in that market?

By Joseph S. Harrington, CPCU

Commercial auto insurance was a leader of sorts in the past decade, as it was the first prominent line to demonstrate that basic rates were not keeping pace with losses. After a few years of corrective underwriting and pricing action, and the widespread implementation of vehicle telematics, will commercial auto be a leader or a laggard in a hard market?

The line saw vastly improved results in 2020, when pandemic-induced lockdowns greatly curtailed shipments. The commercial auto combined ratio fell to 101.8, nearly eight percentage points from the previous year’s 109.3, but still short of the elusive level below 100.0, which would indicate an underwriting profit, something not seen in the line since 2010, according to the Best’s Market Segment Report titled “Near-Term Profitability Still Elusive for U.S. Commercial Auto Writers.”

In the related area of cargo risk, shippers are seeing mixed results.

“It’s critical to improve overall quality of our roads if we are
going to realize the benefits from new vehicle technology.”

—Zac Cosier
Technical Director, Commercial Lines
Underwritingand Product
Nationwide Insurance

CargoNet, a clearinghouse of information on cargo loss in the United States and Canada, reported in its 2021 Supply Chain Risk Trends Analysis a 15% decline in the number of “supply chain risk events” (mostly thefts or attempted thefts of cargo) from 2020 to 2021. At the same time, however, the three largest jurisdictions for cargo theft—California, Florida, and Texas—each saw increases in such activity, with computers and consumer electronics as the primary target.

Persistent headwinds

Commercial auto insurance is seeing pockets of improved profitability,” according to Zac Cosier, technical director of commercial lines underwriting and product at Nationwide Insurance. “While inflationary pressures and driver shortages continue to weigh on the industry, the expectation is for continued widespread improvements in profitability over the next two years, with combined ratios eventually falling below 100.”

Commercial auto liability coverage still faces severe headwinds, in the opinion of Nick Saeger, assistant vice president of transportation products and pricing for Sentry Insurance.

“Nothing happened during the pandemic to alter the landscape with regard to social inflation,” he says. “The cost drivers that existed before the pandemic—attorney involvement and tactics, the threat of nuclear verdicts, and litigation financing—didn’t disappear. In some cases, they may have been exacerbated, particularly the extent to which juries view court cases as an opportunity to redistribute wealth.

“On the other hand,” Saeger adds, “thanks to supply chain disruptions, the pandemic may have now dramatically altered the landscape for physical dam-age claims. Within the last 12 months, the cost to repair vehicles has increased significantly, as has the cost of used vehicles, both passenger vehicles and large trucks.”

As a result, Saeger believes commercial auto now faces “double-digit loss trends” for physical damage claims, with loss severities to increase even more as vehicles incorporate advanced technology.

Given the persistent challenges in the line, Saeger says it is critical that commercial auto insurers maintain pricing discipline. “We’re in the midst of a prolonged hard market, so it could be easy to become complacent,” he says. “But the industry overall is still sporting a combined ratio above 100%, and the loss trends causing that haven’t abated. Rate increases are imperative to 0produce acceptable underwriting results.”

In this hardening market, Saeger cautions fleet operators seeking cover-age to avoid what he calls “cut-rate” insurance. “What they might gain in price they will likely lose in policy [coverage] and claims service,” he says. “Also, they’ll quite likely be facing a significant rate increase in the future, as cut-rate carriers realize that losses are still trending upwards.”

Responding to challenge

Despite his relatively optimistic assessment of the prospects for commercial auto insurance, Cosier notes several persistent challenges to stable pricing and profitability in the line.

“For fleet operators, the biggest challenge continues to be a shortage of quality drivers,” he says. “An account’s ability to [attract and retain] experienced drivers will significantly impact the [range and] cost of coverage options available to it.

“The best risks have robust driver and fleet management programs in place. These risks also see preferred buying options and flexibility with terms.”

Even for quality risks, Cosier says agents and brokers struggling to find markets willing to offer the higher limits needed to address sharply increased claims costs. “Average severity is up by double-digit percentages in the last few years, due to nuclear verdicts, medical inflation, and litigation funding,” he says. “Several sectors within the commercial auto industry—particularly heavy tractor-trailer fleets, livery services, and specialized transportation—have seen insurers pull back on the liability limits available to them.”

While drivers are the most important factors in commercial auto risk, Saeger says that everyone in an organization must be engaged in managing that risk and the related insurance costs.

“It includes executives, dispatchers, drivers, warehouse workers, everyone,” he says. “It’s [built upon] safety procedures that are documented a

nd followed. If they’re not followed, it provides another door that can be opened by plaintiffs’ attorneys.”

“Within the last I2 months, the cost to repair vehicles has increased significantly, as has the cost of used vehicles, both passenger vehicles and large trucks.”

—Nick Saeger
Assistant Vice President, Transportation
Products and Pricing
Sentry Insurance

Last-mile delivery surge

Perhaps the most noteworthy change in commercial trucking in recent years has been the increase in local deliveries of food and goods to customers who previously picked them up in their personal autos.

“One of the biggest trends to come out of the pandemic was the surge in delivery,” says Ryan Mee, vice president of inland marine underwriting at Liberty Mutual Insurance. And he believes that trend will continue.

“Last mile delivery, the transport of goods from a transit hub to its final destination, is rapidly growing,” he says. “Because of the pandemic, consumers are now far more comfortable ordering goods online. With that, the bar of customer expectations has risen. Fast delivery is the new standard and businesses are under increased pressure to get goods to a customer’s doorstep in as little as two days.”

The risks of last-mile, short-haul shipments are distinct from those of long-haul trucking, Mee notes.

Compared to long-haul truckers, “last-mile delivery drivers drive fewer miles and typically haul less cargo at a lower value,” he says, generally resulting in reduced liability for dam-age to cargo. At the same time, “last-mile drivers also make more frequent stops, thus increasing the risk for theft.”

In light of the unique risks facing short-haul, last-mile deliveries, Liberty Mutual recently introduced a motor cargo insurance product designed to cover deliveries by small businesses and “gig economy” drivers at less cost than insurance for long-haul trucking operations.

“Fast delivery is the new standard and businesses are under increased pressure
to get goods to a customer’s doorstep in as little as two days.”

—Ryan Mee
Vice President, Inland Marine Underwriting
Liberty Mutual Insurance

“In a hard commercial auto market, it’s important to look for ways to control costs across all lines,” Mee says. “For insurers, that means offering flexible solutions that allow customers to pay for what they need. For agents, that means closing any education gaps about what certain policies do and do not cover.

“And for the customer, it’s about having a more holistic understanding of their risk and view of their insurance coverage to ensure they are making smart insurance decisions.”

Outside one’s control

No matter how well fleet operators manage their risks, or how well insurance producers and carriers structure and price coverage, commercial auto insurance rates and results will be profoundly affected by factors outside the control of those directly involved in buying or selling it.

“The presence and practices of plaintiffs’ attorneys are largely out of the control of insurers, agents, and fleet operators,” says Saeger. “We all need to work with trade organizations to support legislation aimed at creating a level playing field. There’s been some success in that arena, but more still needs to come.”

In the realm of economics, Cosier says that pandemic-related supply chain disruptions continue to delay delivery of vehicle replacement parts, extending the time needed to repair damaged vehicles and increasing related costs.

He adds that substandard transportation infrastructure impacts driving conditions and contributes to an increase in accident frequency and severity. “The 2021 federal infrastructure deal was a starter for improving infrastructure,” he says, but more needs to be done. “It’s critical to improve overall quality of our roads if we are going to realize the benefits from new vehicle technology.”

For more information:

Liberty Mutual Insurance
www.libertymutual.com

Nationwide Insurance
www.nationwide.com

Sentry Insurance
www.sentry.com

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance cover-ages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.