It's no secret that commercial auto losses have been outpacing premiums overall for years. There are many underlying causes, such as the shrinking pool of qualified drivers, the hiring of a younger workforce more prone to distraction by handheld devices, and the fact that loss severity has been growing since 2009. And with the economic rebound, the number of miles driven has also increased.
Small commercial markets especially sensitive
A Verisk report analyzing commercial auto portfolios shows that insurers will have, over a four-year period, $6.4 billion in premium leakage - and that's just from misclassification of radius. Premium leakage is an expensive problem that affects the whole insurance industry, but underwriters in small commercial markets may feel it more. Insurers in the small commercial auto market may have less tolerance for error because high volume, scale, and speed are so essential - and that makes attention to accuracy vital.
Misclassification can cause a great deal of harm to an insurer's bottom line, but some insurers still make handsome profits. A.M. Best reported that, while market underwriting losses grew at 16.2 percent annually, these profitable insurers tracked 14 points better in combined ratio, on average. A recent report by Verisk shows how controlling premium leakage in commercial auto can start with "low-hanging fruit," rather than tackling a large slice of business and risk alienating customers.
The proof is in the research
Commercial auto is approximately a $32.9 billion market. Statistical data reported to ISO suggests that nine out of ten commercial trucks are reported as local radius. Verisk's research analyzed a sampling from eight major insurers of 230,000 vehicles from 2016. Our analysis showed that 23 percent were sighted outside their stated "local" radius. We were also able to identify a subset of those as "worst offenders" that accounted for the lion's share of losses due to misclassification. That's the low-hanging fruit that an insurer can deal with immediately, and correcting those misclassifications can make a strong impact on improving your bottom line.
How much premium leakage can you recapture? The full report provides answers and offers methods for improving profitability and dealing with premium leakage in commercial auto.