The US commercial auto insurance segment will remain unprofitable through 2023, with rising claims severity due to inflation and increasing litigation risk, despite continued price increases and underwriting changes.
We expect the segment’s combined ratio (CR) to exceed 106% in 2023, as the YTD direct loss ratio in commercial auto liability increased to 72% in 1H23 from 69% in 1H22, with further potential for reserve deficiency recognition. The US commercial auto line has regularly underperformed, with a CR above 100% in 11 of the last 12 years.
Pandemic-related economic lockdowns led to a 25% reduction in reported commercial auto liability claims in accident year 2020, and the associated reduction in legal activity and reserve development led to a rare underwriting profit (99% CR) for the segment in 2021. A recovery in economic and driving activity has gradually returned commercial auto claims volumes to pre-pandemic norms, pushing the CR above 105% in 2022. Loss severity is also affected by other underlying issues, including a shortage of trained drivers in a tight labour market and risks associated with distracted driving, given individuals’ reliance on digital devices.
The negative impact of higher claims severity on commercial auto performance is expected to continue, driven by higher general inflation, shortages in the supply chain and skilled mechanics, and rising used vehicle costs. The average statutory closed claim payment in commercial auto liability will increase by 18% in calendar year 2022. Similar issues are currently plaguing the personal auto line, with underwriting losses in 1H23 amid higher losses from physical damage and bodily injury coverages.
More frequent attorney involvement in transportation claims and greater potential for outsized verdicts in several jurisdictions continue to exacerbate commercial auto loss costs, with insurers’ commercial auto litigation exposure increasing amid the growing presence of the litigation finance industry.
Ride-sharing business, which is included in the commercial auto results of several large carriers, has also generated significant underwriting losses in recent years, driven by inadequately priced business for Uber and Lyft, which require high limits and have experienced increasing litigation activity. In 1Q23, Allstate indicated that it would discontinue coverage for ride-sharing companies unless telematics-based pricing was implemented to better manage pricing and loss costs.
Several years of underwriting adjustments and increased pricing have failed to put the segment’s results on a more profitable footing. These measures are expected to drive an improvement in results in 2024, but a return to underwriting profitability is unlikely in the next few years without a significant moderation in loss cost trends. According to the Council of Insurance Agents & Brokers Quarterly Commercial Market Survey, commercial auto quarterly renewal premium rates have averaged more than 8% since 2017, including a 10.4% increase in 2Q23.
Over the long term, underwriting losses have also corresponded with reserve deficiencies, as ultimate incurred losses have exceeded companies’ original estimates. Prior period adverse reserve development in commercial auto liability averaged approximately 7.0% of calendar year earned premiums from 2013-22, including 6.5% in 2022.
Despite the commercial auto underwriting challenges for the P/C industry, there is wide variation in the results of individual underwriters. Market share is widely dispersed, with the top 10 underwriters accounting for 46% of the 2022 net written premium market share.
Progressive is the leader in both market share and segment profitability, due in part to a focus on smaller accounts and expense efficiencies, with an average statutory CR of 87% from 2018-22. Of the top 10 commercial auto writers, only Old Republic International and W.R. Berkley have average CRs below 100% over the same period. In contrast, Liberty Mutual and State Farm have average segment CRs above 120% over the last five years.
