In 2023, the commercial auto insurance sector in the United States faced persistent challenges, maintaining its position as one of the weaker segments within the property/casualty insurance market. Despite repeated efforts through pricing adjustments and underwriting strategies, the sector recorded a statutory combined ratio above 100 for 12 out of the past 13 years, marking a notably unprofitable 109 for the year.
In contrast, the broader commercial lines insurance sector enjoyed a period of sustained success, boasting an average combined ratio of 97 from 2019 to 2023. This success can be attributed to a prolonged hardening of market prices now in its seventh year, coupled with renewed discipline in underwriting practices, despite heightened volatility in losses from various sources.
Looking ahead to 2024, modest improvements in commercial auto insurance results are anticipated. However, ongoing systemic and economic factors continue to influence claims trends and contribute to uncertainty in loss reserves, posing significant obstacles to achieving underwriting profitability in the near term.
Persistent Underwriting Challenges
Commercial auto insurance, ranked as the third largest product segment in the U.S. commercial insurance sector with $55 billion in net written premiums in 2023, has seen its premium volume grow at an annualized rate exceeding 9% over the past five years. Prior to 2020, extensive corrective measures in underwriting and pricing failed to restore profitability as insurers grappled with risks associated with increased transportation activities, shortages of skilled drivers, and the emerging issue of distracted driving due to complex vehicle dashboards and digital device reliance.
Long-term increases in loss costs have been driven by sophisticated vehicle technologies, which escalate physical damage expenses, higher speed accidents resulting in increased severity, rising vehicular fatalities, and heightened claims litigation leading to larger settlement costs.
Impact of Economic Disruptions
The temporary decline in driving activity during the pandemic briefly alleviated underwriting losses in commercial auto insurance, with the segment achieving a 99 combined ratio in 2021. However, the fundamental challenges persisted and were exacerbated during the economic recovery phase post-pandemic. Average statutory closed claim payments in commercial auto liability surged by 39% from 2019 to 2023, primarily influenced by increased loss severity linked to general inflation, supply chain disruptions, and labor shortages.
Moreover, heightened legal involvement in transportation claims and the rise of potential large-scale verdicts in various jurisdictions continued to drive up loss costs. The growing presence of litigation finance entities further amplified insurers’ exposure to legal risks.
Chronic Issues with Loss Reserves
In addition to ongoing underwriting losses, prior period loss reserves in commercial auto liability have consistently developed unfavorably for the past 12 years. These reserves averaged over 6% of earned premiums annually from 2019 to 2023, reaching 7.5% in 2023. This persistent trend underscores the inherent difficulty in accurately estimating loss costs, negatively impacting earnings and complicating pricing strategies for future business renewals.
Looking Forward
Despite efforts to improve underwriting and pricing practices, the commercial auto insurance industry continues to face challenges in accurately projecting ultimate losses. Recent accident years, particularly 2021 and 2022, have already shown unfavorable development from initial estimates, reflecting the industry’s struggle to anticipate the effects of economic and social inflation.
Moving forward, achieving a sustainable turnaround in commercial auto insurance profitability will necessitate not only continued rate increases but also a concerted effort to mitigate loss severity trends. Enhancing risk selection and leveraging advanced technologies, such as telematics and artificial intelligence, hold promise for driving fundamental improvements in the sector’s performance over the long term.
Conclusion
While price adjustments have been substantial over the past decade, achieving profitability in commercial auto insurance remains an elusive goal. As insurers navigate ongoing challenges, the path to sustained success will require a balanced approach that addresses both pricing adequacy and underlying risk dynamics in the evolving transportation landscape.
