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Commercial auto insurance rates rise as outsize jury awards, inflation add up

Posted On: Mar. 2, 2023 12:00 AM CST

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The commercial auto insurance sector has been fighting a decade-long, uphill battle — achieving underwriting profitability only once in the past 10 years despite consistent rate hikes — and pressures on buyers and insurers show little sign of waning. 

Rising repair and replacement costs have led to higher physical damage claims, but sources say liability losses, driven in large part by rising jury awards and so-called nuclear verdicts, pose a greater challenge. 

Inflation, supply chain issues and a drought of available labor have also added to costs and lengthened repair times, triggering ancillary costs such as temporary car rental or other alternative transportation expenses.

After a profitable 2021 for commercial auto liability insurers, hopes for 2022 have faded. According to data and information gleaned from statutory filings, 2022 will likely show an industry aggregate commercial auto combined ratio above 100% — signaling an underwriting loss — according to James Auden, Chicago-based managing director of insurance at Fitch Ratings Inc. The commercial auto loss ratio is up “quite a bit,” he said.

Loss cost pressures have put upward pressure on commercial insurance rates, which have been rising and continue to do so. The third quarter of 2022 marked the 45th consecutive quarter — or more than 11 years — of increased premiums for commercial auto, according to the Council of Insurance Agents and Brokers.

“We’ve gotten double-digit rate every quarter since 2019 mid-year,” said Chris Kopser, chief underwriting officer, primary casualty, Americas, for Axa XL, a division of Axa SA. Included in Axa XL’s business are large fleets with large deductibles, such as national retailers. 

“The inflated cost of doing the same repairs, providing the same medical treatment, is running near or above double digits in commercial auto in most books of business,” Mr. Kopser said. “What that means is unless you get that amount in your book every year, your loss ratio will get worse, because you’re not getting enough premium to cover the projected losses.”

Manuel Padilla, vice president, risk management and insurance, at MacAndrews & Forbes Inc., manages a fleet of executive autos that renewed in July 2022, and he is beginning his 2023 renewals process. “We expect that the rates are going to increase yet again,” he said.

Mr. Padilla, who is also on the board of the Risk & Insurance Management Society Inc., said that except for 2021 “it wasn’t uncommon to see 20%, 30%, 40% increases in premium,” annually. He added that he is exploring the use of a captive in preparation for the upcoming renewal.

Inflation, supply chain constraints and greater use of technology have added costs to physical damage losses.

Dave Carlson, Cleveland-based U.S. auto and manufacturing practice leader for Marsh LLC, said, “The components in cars today are more costly.” 

For example, a bumper, formerly just a piece of steel, has “morphed” into an injection molded, integrated piece of equipment, supporting sensors, lenses, and other technology. “A bumper is much more expensive than it ever was,” Mr. Carlson said.

Labor is also an issue, mirroring shortfalls in the broader economy.

Nicole McMurtry, Oak Brook, Illinois-based national transportation vertical leader at USI Insurance Services LLC, said she has fleet clients that have raised wages for diesel mechanics 50% to 75% in order to attract and keep qualified labor. “You might have the parts, but you don’t have the staff to repair all the vehicles requiring service,” she said.

Similarly, truck drivers are also in short supply as many older truckers retire and are not replaced or change jobs to work and drive closer to home. 

Even though physical damage costs are rising, sources said increased liability costs — in the form of settlements, litigation and judgments — are by far the larger cost component and challenge faced by the commercial auto sector. 

The outsize settlement numbers dwarf an increased frequency of five-figure auto repair bills, sources say. 

“We are seeing social inflation on the liability side driving up loss costs and combined ratios, and insurers are responding with rate,” said Nick Saeger, associate vice president of products and pricing in Stevens Point, Wisconsin, for Sentry Insurance.

In one high-profile case, a Nassau County, Florida, jury awarded damages of more than $1 billion in a 2021 wrongful death case in a crash involving a truck in Melissa Dzion v. AJD Business Services and Kahkashan Carrier, according to local news reports. The award included $900 million in punitive damages.

In November 2021, a jury in Texas rendered a total award of $730 million to the survivors of Toni Combest, a 73-year-old great-grandmother who was killed in a 2016 collision with an oversize cargo truck hauling a propeller for a U.S. Navy nuclear submarine. 

The Combest jury awarded $480 million in compensatory damages and $250 million in punitive damages in the case, Ramsey et al. v. Landstar Ranger Inc. et al. 

In another high-profile case, a crash involving a Walmart Inc. truck and actor-comedian Tracy Morgan in June 2014 is widely believed to have cost the retailer some $100 million, according to reports.

The American Transportation Research Institute studied information on 600 cases between 2006 and 2019. In the first five years of the data studies, there were 26 cases over $1 million, and in the last five years there were nearly 300 cases. The number of verdicts over $10 million nearly doubled. 

ATRI also documented that from 2010 to 2018, the size of verdicts grew 51.7% annually. Standard inflation grew 1.7% annually and health care costs increased 2.9% annually over the same period.

Mr. Kopser of Axa XL said that although such large awards exceed policy limits, they set a mark for future cases. “Today’s ceiling is tomorrow’s floor,” he said.

He added that excess casualty limits have been substantially curtailed, with lead umbrella lines of typically $25 million now offered in smaller chunks of $15 million or $10 million, with some as small as $5 million, and that towers previously as high as $1.2 billion can only assemble $800 million. “You couldn’t build a tower that big today,” he said.