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Excess and surplus lines insurers have always played a major role in the commercial automobile insurance marketplace, but as deteriorating results cause some admitted insurers to cut back their exposure, commercial auto insurance could become even more important to them, say observers.
The market isn’t without its challenges for the surplus lines market, though. Despite healthy rate increases, new capital hasn’t been flooding into the market, and issues involving an aging workforce continue to concern underwriters (see related story).
The numbers tell the story. Fitch Ratings Inc. reported in July that the commercial auto line — liability and physical damage coverage combined — has generated seven consecutive years of underwriting losses, with the industry statutory combined ratio deteriorating to a 16-year high of 111.1% in 2017.
Additionally, the Council of Insurance Agents & Brokers’ most recent Commercial Market Pricing Survey indicated commercial auto premium pricing rose 8.2% in the second quarter of 2018.
“The rate increases have been better than for most other sectors,” said Mark Dwelle, director of insurance equity research at RBC Capital Markets L.L.C. in Richmond, Virginia. “It’s at least encouraging people to take a look. I wouldn’t characterize it as a sector that people are jumping in with both feet.”
“We have seen more business starting to flow into surplus lines,” said Andrew Brown, president of AmWINS Transportation Underwriters, a unit of AmWINS Group Inc., in Birmingham, Alabama. “Many of the standard markets have restricted their appetite, and as a result we’re seeing a lot of not only trucking but other commercial auto entering the E&S space.”
“Many standard insurers have stepped in and out of the commercial auto space over the course of my career,” said Rebecca Roberts, associate vice president and managing director of Burns & Wilcox Ltd.’s Indiana and Ohio office in Indianapolis. “Maybe as they have done that, they didn’t anticipate the severity of the losses they would encounter. You will often find a surplus insurer to step in and fill that gap. “
One insurance group looking to fill that gap is Lansing, Michigan-based AF Group, which announced the launch of Chicagobased managing general underwriter Fundamental Underwriters in June.
“We saw an opportunity to move into the trucking market, where there’s been a lot of disruption” as major underwriters have withdrawn, said Marguerite Dixen, president of Fundamental Underwriters. “We saw it as a surplus lines opportunity, particularly in the area of pricing flexibility.” For Fundamental’s clients, “it creates both choice and capacity. They get a high service model opportunity in what traditionally is a more transactional” market, she said.
Capacity remains an issue, though.
“The previous results have been a retraction of capacity from both E&S and standard markets,” said AmWINS’ Mr. Brown. He noted that in other sectors, such as catastrophe-exposed property, “you’ve seen insurance-linked securities enter” because of the short-term nature of the exposure. However, he said of the trucking market, “We have a three- to five-year tail; we haven’t seen an influx of supply. We think we’ll see the specialists, who have historically successfully written large accounts, will probably move into the small to midsize accounts. The key point is ‘successfully.’”
“More expensive equipment means loss severity has increased,” said Steve Shepard, Indianapolis-based transportation underwriting manager for Burns & Wilcox. “Some carriers are exiting while some are entering — it’s almost a wash.”
“Excess limits are becoming more difficult by the day because of the recent large trucking settlements and verdicts,” said Tim LaRocca, executive vice president of AmWINS Brokerage of the Midwest in Chicago, in an email. He said AmWINS is still able to structure $100 million to $150 million in domestic capacity by increasing the premium per million. “If we add Bermuda and London into the marketing effort, the larger transportation risks are able to obtain” more than $300 million in limits.
Technology, including the use of electronic logs and forward-facing cameras, may improve results, say observers.
Ms. Roberts said electronic logs feeding information into U.S. Department of Transportation databases have affected “underwriting in a significant way,” providing underwriters with information to see how compliant motor carriers are with regulations.
“At this point, we know that information is accurate; you can’t falsify the information like you can with paper records,” she said.
Ms. Dixen called forward-facing cameras “the single most effective tool we’ve seen today.” She said the “most proactive trucking companies put in forward-facing cameras and monitor the results. We’d like to see that expand to driver-facing cameras and eventually around-the-truck cameras.”
“If you’re at fault in an accident, it allows you to take control of the claim and attempt to close it,” she said. The forward-facing cameras can also provide “definitive evidence that the driver in front of you was at fault.”
But technology has its limits. “Cameras in the vehicles can help, but they need to be on and clear of any issues (blocking or covering them),” said Mark Smith, chief underwriting officer at Victor O. Schinnerer & Co. Inc. in Chevy Chase, Maryland, in an email. “The monitoring tools for the vehicle related to location, routing, speed and braking can also be helpful. Hands-free devices for devices will also help, although they can still present a distracted driving risk. Even with all of this, owner operators and personal vehicles will still account for a substantial amount of vehicles on the road.”
Cyber, representations and warranties, and marijuana coverages are cited by excess and surplus lines market participants as among promising areas of growth for the sector.