US Commercial Auto Segment Expected To Remain Unprofitable in 2023

Automobile Headlights Shine Down Street Running between Skyscrapers with Red Stoplights on Pole in Foreground

September 29, 2023 |

Automobile Headlights Shine Down Street Running between Skyscrapers with Red Stoplights on Pole in Foreground

Despite continued price increases and underwriting changes, the US commercial auto insurance market will likely remain unprofitable in 2023 due to rising claims severity caused by inflation and growing litigation risk, according to Fitch Ratings.

The rating agency said it expects the US commercial auto segment's combined ratio to exceed 106 percent this year, after the year-to-date direct loss ratio for commercial auto liability increased to 72 percent during this year's first half from 69 percent during the same period last year.

"The US commercial auto insurance line has regularly underperformed, posting a (combined ratio) above 100 percent in 11 of the last 12 years," Fitch said in a Fitch Wire article, "U.S. Commercial Auto Insurance Profits Struggle Amid Inflation, Litigation."

Fitch noted that economic lockdowns that resulted from the COVID-19 pandemic led to a 25 percent decline in reported commercial auto liability claims in the 2020 accident year. This was coupled with associated declines in judicial activity and reserve development that led to a rare underwriting profit for the segment in 2021 when it posted a 99 percent combined ratio.

Since then, however, a recovery in both economic and driving activity has moved commercial auto claims back to pre-pandemic levels, pushing the US commercial auto segment's combined ratio over 105 percent in 2022. Other factors are influencing claims activity as well, Fitch said, including a lack of trained drivers in a tight labor market and risks related to distracted driving stemming from drivers' dependence on digital devices.

The rating agency said the negative effects of higher loss severity on commercial auto insurers' performance are expected to continue, driven by higher inflation, supply chain and skilled mechanic labor shortages, and increasing used vehicle costs. The average statutory closed claim payment in commercial auto liability increased 18 percent in 2022, Fitch said.

In addition, "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 risk increasing amid the expanding presence of the litigation finance industry," Fitch said.

September 29, 2023