The commercial auto insurance line has been generally unprofitable since 2012. Over the past five years, commercial auto underwriting losses have grown 11.8% a year on average, while premiums have lagged at an 8.2% average annual growth rate, equating to a staggering $14 billion in underwriting losses, according to A.M. Best Company data. The combined ratio for the latest full year of A.M. Best data, 2018, was 105.7%.
Three challenging trends
At the most basic level, three macroeconomic trends have challenged commercial auto insurers:
- economic growth over several years, translating to more vehicles clocking more miles
- drivers, specifically an increase in inexperienced drivers to meet demand
- technology, driving repair bills up and fueling distracted driving
Focus on drivers
As the shortage of experienced drivers grows and the number of loads increases, drivers may be pushed either to drive more—potentially violating hours-of-service regulations—or to complete trips faster. The former may add to driver risk through fatigue and distracted driving, and the latter can mean higher speeds, potentially putting drivers and vehicles at risk for accidents and the ensuing legal ramifications.
These additional risks can increase claims and create premium leakage if insurers don’t respond with timely monitoring of drivers and their activity. And of all the aforementioned trends—the economy, drivers, and technology—the driver trend has potential to exert one of the larger impacts in terms of unfavorable loss experience.
However, even with the challenges commercial auto insurers face, some are able to mitigate their losses better than others and produce combined ratios significantly lower than the total industry.
Focus on Profitability
Verisk has found that success in commercial auto generally requires focus on three drivers of profitability.2
First, letting data drive risk selection and rating decisions enables an insurer to target and segment risks effectively, defining the risk and knowing when to underwrite and when to walk away.
Employing analytics to drive the strategy in selecting, pricing, and underwriting acceptable risks is the second important driver. It’s important to know what vehicles are being used, how, and where. But it’s also critical to know the operators driving those vehicles and their driving histories.
Finally, it’s essential to regularly review performance and audit exposures to ensure profitability in commercial auto. Tying back to the driver trend, insurers that monitor their existing portfolios for changes and deploy strategies to track and improve driver safety can be better positioned to keep rates adequate throughout the policy life cycle.
The role of MVRs
Motor vehicle reports (MVRs) are an important and essential part of informing decisions within each of the drivers of profitability. Research has shown that violations correlate to crashes. The American Transportation Research Institute reports that truck drivers convicted of a violation are 43% more likely to be in a crash. And not only that, those convicted of a reckless, careless, inattentive, or negligent driving violation are 68.9% more likely to be in a crash.1 Knowing this information up front can help insurers make informed decisions on risks.
But MVRs aren’t cheap. Verisk’s analysis shows that over the past ten years, the average cost of an MVR has gone up 43% to an overall average of $10.14 as of February 1, 2020. Fees can vary drastically from state to state. In states such as Oklahoma, where an MVR costs $27.50, some insurers may find the price cost-prohibitive and forgo ordering altogether.
The convergence of economic, driver, and technological trends makes it more important than ever for commercial auto insurers to have data that helps ensure they’re obtaining and pricing risks appropriately. Underwriting data tools are available for all types of commercial auto risks, with the potential to reduce expenses and improve profitability by targeting data spend.
Verisk offers a complete suite of commercial auto underwriting products, including a full MVR product line. In addition to the standard MVR return, Verisk offers driver-monitoring services and cost-containment products that incur full MVR expense only when a violation is found.
- A.M. Best
- Verisk research
- American Transportation Research Institute, Predicting Truck Crash Involvement: 2018 Update, July 2018
- Verisk research