Commercial Auto: It’s A Long Road Ahead to Profitability

The commercial auto market has a long road ahead to reach profitability after five consecutive years of underwriting losses from 2011-2015. While many insurers upped rates in 2016, the year appears to be coming in with another significant underwriting loss.

There isn’t a fix-all solution for the industry to get back on track, experts say. Simply raising rates in this challenging line isn’t enough. Carriers, insureds and their agents must each play a role in managing today’s commercial auto market.

Commercial auto has had the poorest underwriting performance results of any line of commercial insurance in recent history, according to a report by Conning, Commercial Automobile Insurance – Fix Me, Please (2017).

“Through the third quarter of 2016, results remained unfavorable from adverse loss frequency and severity trends,” Conning said. “The 2015 loss and combined ratios of 87.7 percent and 108.8 percent, respectively, were 15 points worse than commercial lines overall.”

As in personal auto, the rise in claims is cause for concern in commercial auto. The increase is linked to higher medical costs associated with catastrophic injury claims and increased distracted driving.

Chris Moulder, vice president and broker at Worldwide Facilities LLC, believes there are fundamental issues that need to be addressed beyond increasing rates.

“The underwriters that specialize in commercial auto or specialty auto are starting to realize they can’t just throw rates at an underperforming class of business and just hope for improvement,” Moulder said. “It’s going to take a lot of work to improve performance,” he said.

Distracted Driving

Distracted driving is one of the biggest issues affecting commercial auto results.

Distracted driving – which includes using a cell phone, texting, using navigation systems and eating while driving — is to blame for more than 3,000 deaths each year, according to the Centers for Disease Control and Prevention (CDC).

Another 400,000 people are injured each year in distracted driving accidents and some 15 percent of those are generated from commercial motor vehicle accidents.

“It is a significant risk and has been for a number of years,” said Andrew Gibb, partner at the law firm Lindabury, McCormick, Estabrook, and Cooper, in a recent A.M. Best webinar titled “Pileup in Commercial Automobile.”

“The statistics regarding distracted driving across the board with commercial, personal and regular automobiles are eye-opening.”

Distracted driving is a growing problem, but it’s not the real reason accidents are trending up, according to Brian Sullivan, editor for Risk Information Inc.

“The reason accidents, claims and deaths are going up is because more people are driving more miles,” he said. More people on America’s roads equals more accidents.

Other factors are leading to the rise in auto accidents, too. Speed is becoming a greater concern, especially in commercial auto.

“When it comes to speed, there are few things as directly correlated with death and driving as high speeds but states are ignoring that (correlation) and approving (higher speed limits),” Sullivan said.

Even after decades of state laws requiring seat belt use, concerns remain when it comes to auto claims, Sullivan added.

But no other factor has led to such a swift spike in auto claims as miles driven, Sullivan contends.

“The industry went from flat (claims) to up almost overnight about two years ago. What changed that could make claims spike so quickly?” he asked.

“It wasn’t distracted driving,” Sullivan said. “It’s not seat belt use or even speed. The only thing that changed suddenly was miles driven, which after about a seven-year period of going nowhere, literally not rising, started rising (suddenly) at a rate of about 3 percent a year.”

Sullivan said miles driven and accident rates aren’t linear.

“In other words, a 3 percent rise in driving doesn’t lead to a 3 percent rise in accidents,” he said.

An increase in miles driven will lead to more accidents because there are now 3 percent more drivers driving on a fixed road base.

“So the opportunity for accidents goes up exponentially and not in a linear fashion,” he stated. “That’s why accidents and death growth is outstripping miles driven.”

Estimates released in February by the Federal Highway Administration show U.S. driving topped 3.2 trillion miles in 2016, the fifth straight year of increased mileage on U.S. roads.

More than 263.6 billion miles were driven in December 2016 alone, which is a .5 percent increase over the previous December.