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Ballooning claims roil commercial auto sector

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Changing players and increasing claim severity have shaken the commercial auto insurance sector as some insurers retrench amid soaring settlements and awards.

Both American International Group Inc. and Zurich Insurance Group Ltd. addressed commercial auto coverage in their latest results.

AIG noted “higher current accident year losses in health care and in U.S. commercial automobile liability.” The company also said in a filing with the Securities and Exchange Commission that it was increasing commercial automobile liability reserves by $402 million for the nine-month period that ended Sept. 30.

The company did not respond to requests for comment.

Zurich went a step further in its third-quarter release, saying it would “exit two portfolios in global corporate, including part of the U.S. transportation business.”

In response to questions, Zurich said last week it will no longer offer casualty cover for U.S. companies in three categories.

“The majority of the business is long-haul trucking and some passenger transport services,” Zurich said in a statement. “Zurich is not exiting the U.S. auto liability, auto physical damage, workers compensation or general liability markets.”

“There are carriers that had pretty adverse results and are taking, from what we see, pretty drastic action in the marketplace,” said Bill Smyth, vice president of casualty at Berkshire Hathaway Specialty in Boston, which runs the company's excess trucking and transportation book of business.

“Obviously, some of the legacy carriers are feeling the pinch,” said Tony DeFelice, managing director of Aon Risk Solutions' national casualty practice in New York.

One factor roiling the commercial auto market is an increase in severe claims, sources said.

“I do believe that we have seen massive increases in terms of severity on auto,” Mr. DeFelice said. “Over the past year, I myself have witnessed about five large auto liability claims ranging from $7 to $8 million all the way up to $50 million.”

Dan Aronson, U.S. primary casualty placement leader at Marsh L.L.C. in New York, cited an example of rising costs in auto claims.

“Ten years ago we would have said that a large commercial auto claim would be $10 million dollars,” said Mr. Aronson. “Well, $10 million became $20 million, which became $30 million, and we've now seen some cases as high as $40 million, if not more, in the past couple of years.”

“There have been some notable cases which have had astronomical settlement values in excess of $25 million and upwards,” said Pamela Ferrandino, national casualty practice leader at Willis North America Inc. in New York. “Those are big numbers, and it's very hard to differentiate a favorable risk from an average risk, no matter what your rate on line is, to ever price for that sort of volatility of loss.”

“Everyone is agreeing that severity is an issue,” said Tracy Dolin-Benguigui, director of financial services ratings of North American insurance at Standard & Poor's Corp. in New York.

One key driver of costs is medical care as safer cars are allowing people to survive accidents that previously may have been fatal.

“People survive accidents, but with absolutely critical injuries which require lifelong care; and the value of those lifelong care plans has dramatically skyrocketed in recent years,” said Steve Hackenburg, chief broking officer of national casualty at Aon Risk Solutions in New York.

“Severity continues to be impacted by the rising cost of medical care,” said Steve Assennata, senior vice president and head of the client group specialty markets at Munich Reinsurance America Inc.

“If you think about the average auto loss of significance, a big component of that is medical loss,” said Debbie Michel, executive vice president of national casualty for Liberty Mutual Insurance Co. in Chicago.

General loss costs have also increased, some 4.0% in 2013, then 7.0% in 2014 and 8.0% in 2015, added Ms. Michel.

As some insurers have moved to stem such losses and reduce their commercial auto business, others have seen opportunity.

“Our growth through July of this year was about a 40% growth rate in terms of premium,” said Berkshire's Mr. Smyth. “If you look through the end of October, that doubled.”

“We didn't write nearly as much in the first seven months as we have in the last three months,” said Mr. Smyth.

That growth seems poised to continue.

“The number of submissions, the number of requests and the number of folks who have come to track us down and say, 'Hey, we really want a quote from you,' has changed dramatically,” said Mr. Smyth.

Berkshire Specialty has “been building out their infrastructure and ramping up production and in 2015 it continued to expand quite a bit,” said John Iten, a director at S&P, of Berkshire Specialty's overall business.

Renewals amid the changes have varied.

While 15% of clients saw rate increases, 23% saw rate decreases, and the largest group by far, 62%, renewed flat, said Aon's Mr. Hackenburg.

“Today we are in what I would consider to be a flat rate environment,” said Ms. Ferrandino.

Several sources agreed that there was ample capacity available and the sector remained competitive, allowing many clients to renew coverage without rate increases.

“When I look at the spread of rate on our book of business, it's not like everyone is at plus 3% — there's good spread, just like there should be,” said Ms. Michel.