As I watch my young sons play, 75 percent of their time revolves around commercial vehicles. They crash dump trucks into garbage trucks daily. Sirens blare from their police cars and fire trucks as they rush to whatever emergency two-year-olds imagine. The sounds of an ice cream truck on a warm, summer day send them dashing through doors at light speed.
When did the excitement of commercial vehicles vanish and become mundane? I don’t recall the precise moment I started taking these thrilling machines for granted, but the joy and excitement vanished over time. The same lack of excitement and attention can be held as true for commercial auto insurance today. Within the insurance industry many consider commercial auto insurance to be taken for granted and that it has generally not experienced the changes and attention other lines have. Currently, personal lines and workers' compensation lines of insurance tend to command far more attention, partially due to larger markets, while commercial auto has remained in the background for years, gathering dust. This may have attributed to diminished profits and an overall lack of excitement about the future of commercial auto insurance. Insurers have experienced relatively flat loss and combined ratios for years, teetering at the edge of profitability. According to data from A.M. Best, combined ratios have averaged 106 from 2011 to 2015, marking the fifth consecutive year commercial auto has reported an underwriting loss.
But the deterioration of combined ratios in recent years has forced a need for more effective tools to rate more accurately and combat adverse selection. Insurance carriers have long used predictive models and analytics in personal lines, but few have applied resources toward similar advancements in commercial auto. In a 2013 survey conducted by Earnix and ISO, 32 percent of commercial auto writers indicated they leverage predictive modeling, compared with approximately 50 percent of personal auto insurers. A major reason for minimal analytic development is the limited amount of data to build credible predictive models for most commercial auto insurers. New data sources and capabilities can help bridge the deficiency, and we’ve seen more and more carriers begin to apply predictive modeling to commercial auto. We’re trending, albeit slowly, in the right direction with the adoption of more advanced tools, but we still have a long road ahead.
Not long ago, insurers were typically rating fleets of vehicles without detailed knowledge of drivers and vehicles and often using dated techniques to derive rates. The Information Age has led to copious amounts of data available about a potential risk. No longer can we turn a blind eye to the bad habits of the past. We have methods to access data, we know better than to ignore missing information, and the financial results have shown us the consequences of our past actions. Those leading the way to modernization and the development of the commercial auto market have been using and will continue to use data, analytics, and advanced techniques to gain profitability and market share.
While my sons’ interest in the wide variety of trucks may decline, commercial auto rating can still be relevant when they’re old enough to buy toy trucks for their kids. We just have to regain that enthusiasm for commercial auto and never let go.
At ISO, we’re developing products to help insurers with commercial auto rating. ISO Risk Analyzer® Commercial Auto is a powerful predictive modeling tool that allows insurers to evaluate commercial auto risks with more accuracy and target their marketing, underwriting, and pricing efforts. If you have any questions about this product or commercial auto in general, please feel free to contact me at Douglas.Wing@verisk.com or 207-462-4027.