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Commercial auto policyholders can expect ongoing price increases in 2019 as U.S. property/casualty insurers continue to reduce capacity in the face of continuing “substantial” underwriting losses in this segment, according to a report issued Tuesday by credit rating agency Fitch Ratings Inc.
The segment’s statutory combined ratio of 108% in 2018, down from 111% in 2017, means that commercial auto insurers are poised for a ninth consecutive year of underwriting losses in 2019, with only a “modest” improvement in results expected, Fitch said in the report.
Insurers continue to take more aggressive underwriting and pricing actions to restore performance for this problematic segment, Fitch said.
The Council of Insurance Agents & Brokers’ Commercial Market Pricing Survey reported premium rates increased for the last 31 quarters, including a nearly 9% increase in first-quarter 2019, Fitch said in the report.
"Pricing increases alone have been insufficient. The chronic underwriting losses in commercial auto in the last eight years reveal a need for change in several areas including risk selection, underwriting practices, and claims," James Auden, managing director in Fitch's Insurance Ratings Group, said in a statement.
More aggressive pricing in response to poor results made commercial auto the fastest growing commercial lines market segment in terms of written premiums in the last several years, Fitch said in the report.
Statutory direct written premiums for commercial auto increased 13% in 2018, but increasing claims severity, particularly on bodily injury claims, nullify the gains of premium rate increases, according to the report.
As a result, loss ratios for the most recent accident year are still consistent with a significant underwriting loss, Fitch said.
Inadequate pricing and unanticipated claims cost increases are in part revealed through loss reserve deficiencies, the report said.
“Commercial auto liability adverse development totaled greater than 7% of annual earned premiums for each of the last four consecutive years (2015-2018),” Fitch said in the report.
Advances in technology and more sophisticated analytics offer opportunities for insurers to restore profitability, and telematics offers the most promise in providing useful information on driver and vehicle activity based on the use of these tools in personal auto, Fitch said.
“Besides capturing information useful for segmenting risk and establishing premium rates, information can be used in claims assessment, for driver training and risk management purposes,” the report said.
For policyholders, this information can provide value in tracking vehicle maintenance needs, improving routing efficiency and lowering fuel costs, Fitch said.
Insurers that lag in innovation face future risks of adverse selection in the underwriting portfolio, higher loss ratios and expense disadvantages, the report said.