Vehicle insurance report paints grim picture for industry, rates

The commercial auto insurance market, which includes truck insurance, has been a weak performer for years. That isn’t likely to change anytime soon.

That’s the conclusion of a report by the AM Best ratings agency. The very title of the report — “Profitability Remains Elusive” — signals that any relief for truckers coming from an improvement in the finances of the insurance industry in general will be a tough hill to climb.

In the same way that operating ratio is the most basic measuring stick of trucking and transportation profitability, combined ratio is the benchmark for insurance. Just like an OR of more than 100 signals unprofitability, so does a combined ratio in insurance.

According to the AM Best report, the commercial auto sector, which includes trucking, has not had an industrywide combined ratio of less than 100 since 2010. The deterioration has been almost annual, with an improvement in 2014 that didn’t stick and another in 2018 that also turned further negative for the industry in 2019. The combined ratio in 2019 was 109.4, the third-worst in the stretch of red ink from 2011 through 2019.

The report said the 2019 underwriting loss of $3.9 billion “is the worst loss in 10 years, continuing a trend of progressively worsening results for commercial auto writers.”

Loss and loss adjustment, part of the calculation for the combined ratio, “continues to grow because more claims are going through costlier litigation,” the report said.

And the problem in the auto sector is not part of a problem across the insurance industry in general. The combined ratio was higher than that of the property and casualty or the “commercial lines” insurance business.

More troubling is the fact that for the insurers, what the industry calls “prior year loss adverse development” was up 7% in 2019 to $2.5 billion. What that means is that while insurers had planned for a certain level of losses on claims that had not yet been settled, the claims ended up 7% worse to the insurer than planned.

According to AM Best, 2019 was particularly off the mark. Each of the 10 prior accident years had “adverse development,” a situation the analysis calls “extremely rare.” But at a certain point, the situation should turn, AM Best says, given how unusual that period has been: “this means that some prior years may develop favorably moving forward,” the report said.

Pricing and risks need to be aligned

But it’s the overall situation that portends higher rates for clients of the commercial auto line. “Going forward, companies will have to do a better job of pricing risks to be commensurate with escalating loss costs on the pricing side,” the report said.

The report concedes that has been going on. Insurers “have made concerted efforts to raise rates and improve price adequacy,” AM Best said, citing various industry surveys.

But it may not be enough, the report said, pointing to nuclear trucking verdicts. “Tighter underwriting standards and raising rates can do only so much to address rate needs for commercial auto writers when large jury awards are such a serious issue for the industry,” AM Best said.

One of the reasons for the surge in litigation and subsequent verdicts, the report said, is “litigation financing,” with a third party financing an attorney’s cases, allowing those attorneys to pursue a higher number of cases. The report cites the now-familiar list of developments and possible reforms that could alleviate that burden: plaintiffs going after the trucking company as well as the driver; putting more cameras into the cab and truck; seeking tort reform.

But the report also says plaintiffs in cases are arguing that the verdicts should persuade the trucking industry to move away from certain steps it is advocating, “such as lowering the minimum age to acquire a commercial driver’s license or easing hours-of-service regulations.” (The push by the industry on a minimum age is not about the age for obtaining a license; it is the ability to drive on the interstate at less than 21 years old.)

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