Rating Agency Sees Change of Fortune for US Commercial Auto Insurers

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October 13, 2022 |

A globe resting on the ground with graphs in the background

After posting favorable results in 2021, US commercial auto insurers' first-half results for this year suggest a reversal in fortune, similar to their experience in the 2010s, according to A.M. Best.

Best noted that 2021 saw US commercial auto insurers experiencing a combined ratio under 100 percent for the first time in more than a decade. In a new Best's Special Report titled "Hints of Trouble Resurface for Commercial Auto after Bright 2021," the rating agency said that in 2021, despite a small net underwriting loss, the commercial auto segment experienced its best year since 2011.

While the segment's 2021 loss ratio was higher than the loss ratio 10 years earlier, the combined ratio of 98.7 percent was 4.6 percentage points lower, Best said. The decline was the result of commercial auto insurers cutting underwriting expenses to 26.3 percent in 2021 from 31.7 percent in 2011.

"For several years, insurers have been maintaining greater pricing discipline while striving to obtain more adequate rates for the exposures being presented," Christopher Graham, senior industry analyst at A.M. Best, said in a statement. "With 10 years of persistent average rate increases, the segment saw marked improvement in 2020, followed by additional, albeit smaller, improvement in 2021."

Best noted that with the easing of COVID-19 pandemic conditions, loss severity, driven by higher repair costs for more sophisticated vehicles along with social inflation on liability claims, continues to increase.

"A return to normal travel and shipping levels could bring an increase in injuries and fatalities, which may imminently drive higher loss ratios," David Blades, associate director at A.M. Best, said in the statement. "The four largest states in terms of direct premium present a conundrum since they are among the 10 states with the highest loss ratios, on a 5-year average basis and for the most recent year. Without further improvements in these states, continued improvement for commercial auto will be challenging."

Adverse loss reserve development on prior years has also had a negative impact on calendar-year results over the long term for the US commercial auto segment, Best said. The rating agency noted that for each of the past 10 years, insurers' established reserves required fortification.

"Social inflation has impacted commercial auto insurance more than any other line over the past decade," Mr. Graham said. "The continued adverse reserve development is a sign that insurers' reserving techniques have yet to catch up with judicial trends."

October 13, 2022