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Rate increases are finally gaining some traction in the troubled commercial auto sector and the outlook is “encouraging,” according to a briefing Thursday by Jardine Lloyd Thompson Group PLC.
Commercial auto lines have been chafing under a range of issues for years, JLT said.
“A stronger economy, commercial driver shortage and smartphone-driven increase in distracted driving were leading factors in auto insurers’ deteriorating claims experience since at least 2010,” said the broker.
Both frequency and severity became issues, driven by an increase in drivers in a growing economy and medical inflation as well as “more expensive components and services.”
While new and emerging safety technologies promise to reduce claims frequency and severity in the long term, the only meaningful impact of this technology in aggregate so far has been to increase the average cost per accident — a sensor-infused bumper, for example, can cost three to six times as much to replace as its low-tech antecedent,” the briefing said.
Higher rates and other controls have helped turn the corner, JLT said.
“After several years of lagging improvements in rates, underwriting guidelines, and fleet management controls, among other improvements, the outlook for the U.S. commercial auto insurance segment is encouraging,” JLT said, adding “further rate strengthening should be reflected in improved accident year profit margins for the top tier underwriters in 2019 and through 2020.”
The commercial auto achieved a peak quarterly increase of 8.2% in the second quarter of 2018, according to The Council of Insurance Agents & Brokers, JLT said.
Rate increases, however, are beginning to decline, a potentially positive sign, the broker said.
“In a sign that rates are beginning to prove adequate, for the first time in the past 10 consecutive quarters, the Q3 2018 increase was less than the previous quarter, coming in at 7%,” JLT said.
While the industry has not entirely solved its commercial auto problem, the measures taken appear to be helping, JLT said.
The commercial auto line remains a sore spot for many insurers, but it’s clear that underwriting strategy and risk controls can materially improve results.
“Over the last 10 years, even as a number of specialists have managed to earn underwriting profits in the segment, U.S. commercial auto has been difficult for multiline carriers,” Mark Shumway, global head of strategic advisory for JLT Re, said in a statement released with the briefing.
“While serious problems remain, including inadequate accident year reserves and elevated claims frequency, remedial actions are now finally starting to prove sufficient for discerning carriers,” he added.
The commercial auto sector continued to weigh on the profitability of U.S. property/casualty insurers during 2016 and will likely see continued rate increases, according to a report from Fitch Ratings Inc. released Thursday.