Commercial auto continues to drag on the U.S. insurance industry’s results, with first-half 2024 results showing continued deterioration despite hefty price increases every quarter for the last 13 years, according to a new report from AM Best.
“U.S. commercial lines performance has been strong, particularly in 2022 and 2023, attributable to strong underwriting performance for lines such as workers’ compensation and surety, and solid performance of other lines, in addition to renewed market underwriting discipline. However, commercial auto has been the weakest line for more than a decade, producing net underwriting losses every year from 2013 through 2023,” said AM Best in its latest market segment report.
Pricing for the line remains inadequate, even with 52 consecutive quarters of rate increases, the ratings firm said, but “consistently poor” loss development has prevented insurers from keeping pace. Adverse loss development exceeded $3 billion in 2023, AM Best noted. When insurers need to boost reserves for older accident years, they cut into profit for the current year and have added at least six points to the aggregate loss ratio for the line in eight of the last 10 years.
Insurers may also be undercutting themselves with certain competitive practices, like writing commercial auto at a small loss in order to win accounts.
“Writing commercial auto for the opportunity to write other more profitable coverage lines has to come into greater question as the magnitude of the troubled line’s losses grows. As results remain unfavorable or worsen, insurers may find that such a strategy is no longer tenable,” AM Best warned.
The auto physical damage loss ratio has remained fairly static, with marginal profitability since 2018, but the liability piece continues to worsen. In fact, the average loss per commercial auto liability claim has more than doubled since 2014, AM Best found.
The commercial auto line incurred a net $5 billion loss in 2023, and 2024 isn’t looking much better, according to the report. The top 20 commercial auto writers in the U.S. have reported a mixed bag but mostly unfavorable results for several years.
“The poor results in underwriting commercial auto insurance have not been limited to a few companies in a few years, but has been the line’s long-term story,” AM Best said, adding, “Calendar year 2024 seems to be on its way to producing another year of poor results, unless there are signs during the second half of the year that the pricing increases and underwriting initiatives have finally started to generate improvement.”
While the frequency of high jury verdicts, settlements, and inflation have a major impact on commercial auto losses, AM Best also highlighted the worsening effect of distracted driving and driver shortages. In 2022, per the National Highway Traffic Safety Administration, 8% of all crashes, 12% of crashes resulting in injuries, and 11% of police-reported motor vehicle crashes were reported as distraction-related. Driver shortages also mean fleet owners must turn to less experienced drivers to fill open positions.
“For commercial insureds, not only do less experienced drivers statistically increase the potential for accidents and subsequent claims, but it also makes the commercial business entity more costly to insure. No end to the driver shortage is in sight, so businesses need to focus on training drivers to prioritize road safety,” said AM Best.