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Auto rates accelerate on rising accidents, costs

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While rates in most commercial insurance lines continue to fall, commercial auto pricing keeps heading in the opposite direction and shows no signs of hitting the brakes, experts say.

Big insurers exiting auto lines, increased miles driven, distracted driving, larger court settlements and higher repair costs are all cited as reasons for the increases.

Willis Towers Watson P.L.C. said in its Commercial Lines Insurance Pricing Survey, released March 13, that while most commercial lines were nearly flat in the fourth quarter of 2016, “commercial auto once again experienced meaningful price increases.” Willis said the line’s cumulative price increase since 2012 is over 25%, compared with roughly 10% for the commercial market as a whole.

In February, the Washington-based Council of Insurance Agents & Brokers reported that commercial auto was the only sector reporting price increases, beginning at 2.7% in the fourth quarter of 2015 and rising to 4.4% by the fourth quarter of 2016.

“I would say the norm on the commercial auto liability line on the primary layers is probably in the mid-to-high single digits,” said Todd Reiser, vice president of transportation at Lockton Cos. L.L.C. in Kansas City, Missouri. “On the excess layers, I would say anywhere upwards from $3 million and above in limit, that’s where we’re seeing more drastic rate increases. I would say on a general trend, you’re looking at starting point of 10% and up.”

In its 2016 fourth quarter casualty report, Marsh L.L.C. said that automobile liability continues to be the most challenging of the three primary lines, noting that “several insurers have stopped writing more challenging transportation risks — mainly, long-haul trucking.”

Auto insurance is “an area that is sneaking back up to us all,” Paul Horgan, head of commercial Insurance, Zurich North America, said at the Philly I-Day 2017 in Philadelphia in March. Zurich exited long-haul trucking and some passenger transport lines last year.

“Auto has really taken the industry by storm. Everybody is struggling with it. There have been a number of announcements with reserve strengthenings on that. We see the industry right now as 20%-25% underpriced in that space. You can’t just send out a bill for 25% more. It’s going to take innovation on training the underwriter and our customers on driving, on helping to use the technology that’s in the cars today better. There are always bread-andbutter challenges that this industry needs to address and auto is certainly one of those.”

More recently, David Long, chairman and CEO of Boston-based Liberty Mutual Holding Co. Inc., said in a March 1 analysts call that fourth-quarter operating income was down primarily due to elevated losses in U.S. personal and commercial liability. He noted an increase in highway miles and in distracted driving highway miles leading to more serious accidents, as well as repairs to cars with advanced driver assistance systems.

The U.S. Department of Transportation’s website Distraction.gov said that in 2014, 3,179 people were killed and 431,000 were injured in motor vehicle crashes involving distracted drivers.

“Suffice to say both personal and commercial auto markets are in need of additional rate,” Mr. Long said.

“I think what you’re seeing is a fundamental thing of the market responding in terms of pricing lagging the frequency and severity of events that are occurring in the marketplace today,” said Gerry Glombicki, Chicago-based director with Fitch Ratings Inc. “The hard part with insurance … is that you don’t know your costs of goods sold when you sell the product.”

The commercial auto combined ratio has also been climbing, according to the Insurance Information Institute.

In 2005, the net combined ratio for commercial auto was 92.1%, the III said, while in 2015 it had risen to 108.8%, the latest year for which figures are available.

“Around 2005-2006, carriers started to cut rates pretty sharply for two or three years,” said James Lynch, III’s New York-based chief actuary. “As a result, the loss ratios they booked were too low in those years. In the subsequent years, they figured that out and they had to add to their reserves and, of course, that will deteriorate your results. Then right about the time they got through that, they started to have a problem with increasing frequency around 2012-2013. And that continued to this day.”

Mr. Lynch also said there was a shortage of truck drivers, leading to the hiring of young, less experienced drivers.

Bob Pitcher, state laws vice president with American Trucking Associations, Arlington, Virginia, agreed that there has been an ongoing shortage of truck drivers due to competition from construction in particular and from the fact that “that trucking is a hard and unusual career.” 

As insurance prices have increased, Mr. Pitcher said larger trucking companies have been opting to self-insure to an extent, “so that their insurance is more reinsurance.”

Another issue affecting pricing is increasing medical costs related to improvements in care, said Dan Aronson, U.S. primary casualty placement leader at Marsh L.L.C. “We have greater medical care, so someone who would’ve passed away is living a much longer life and there’s a lot more care that can be provided and there’s more expensive pain drugs and better treatments for burn victims.”

Anthony DeFelice, New York-based casualty practice leader with Aon Risk Solutions, also cited growing accident settlements as a factor that’s pushing up commercial auto rates.

“We wouldn’t necessarily see automobile liability claims in excess of $10 million dollars,” he said, “but in the last couple years, it’s very much routine to see in excess of $10 million and sometimes in the $40 million to $50 million range,” he said.