US commercial auto sector deteriorates further

The performance of the commercial automobile insurance segment in the US has lagged that of other property/casualty (P&C) industry sectors for several years and continued to deteriorate through the third quarter of 2017, according to AM Best.

Commercial auto insurers have tried to address unfavourable results by enhancing underwriting measures and aggressively raising rates to improve rate adequacy, the ratings agency noted.

Stung by adverse reserve development at the end of 2011 (after five years of favourable development), companies recognized that the pricing levels were inadequate and began pushing average rates in the sector upward at a growing pace, which continued through the third quarter of 2017.

Nevertheless, commercial automobile lags the overall commercial lines group and continues to underperform the P/C market as a whole, according to the ratings agency. Adverse reserve development has contributed to consistent increases in net underwriting losses over the past six years, but insurers initially appeared slow to react as loss trends outpaced rate increases, and commercial auto underwriting losses grew from $744.8 million in 2011 to slightly over $2.9 billion in 2016. In addition, owing to the lag before results fully recognize premium price increases, profitability remains pressured, and, as loss costs rise, insurers are stuck playing catch-up.

The difficulties of underwriting commercial auto are being compounded by rising claims frequency owing to more commercial vehicles being on the road as the economy rebounded following the recession with record growth in miles driven and an increase in distracted driving. Rising vehicle repair and medical costs are also driving up claims severity.

After lagging by several quarters, insurers have made concerted efforts to raise rates, but have been unable to stop the bleeding. Reversing the unfavourable results will be an uphill task for the industry and will have to be accompanied by more discriminating risk selection, prudent reserving, and appropriate pricing, AM Best said. On the positive side, the results of the aggressive rate increases—particularly over the last two years—should start manifesting over the near term.

The largest US commercial auto liability insurer by direct premium written (DPW) is Progressive Insurance Group with $1.82 billion DPW in the third quarter of 2017. The firm’s loss ratio was at 64.7 percent over the period.

The second largest player is Travelers Group with $1.33 billion DPW and a loss ratio of 62.2 percent in the third quarter of 2017. The firms are followed by Liberty Mutual Insurance Companies with $1.01 billion DPW and a loss ratio of 111.9 percent and Nationwide Group with $992 million DPW and a loss ratio of 80.7 percent. Other major players in the market are Zurich Financial Services NA Group, Berkshire Hathaway Insurance Group and Old Republic Insurance Group.

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