Underwriting losses in the U.S. commercial auto insurance segment soared to $3.3 billion in 2022 following near-breakeven results in the previous year, according to a new AM Best report.
Commercial auto insurance has been one of the worst-performing lines of business in the property/casualty industry since 2012, generating a higher combined ratio each year than that of the broader property/casualty commercial lines industry, However, in 2021, the combined ratio improved to less than 100 for the first time in over 10 years, in part due to fewer autos on U.S. roadways owing to the COVID-19 pandemic. The new Best’s Special Report, titled, “Pre-Pandemic Woes Return to Commercial Auto,” states that long-standing headwinds for commercial auto insurers, including social and economic inflation, remain prevalent and impactful.
“The liability component has been more problematic than the physical damage component, which is no surprise since adverse loss reserve development, driven by social inflation, tends to be a bigger issue for liability claims, which generally have a longer tail than property damage claims,” said Christopher Graham, senior industry analyst, Industry Research and Analytics, AM Best. “Even with that, though, the physical damage combined ratio is deteriorating.”
According to the report, commercial auto pricing has risen steadily during the past 10 years, but the pricing increases have not kept pace with inflation. In addition, with adverse development on prior-year losses driving the combined ratio higher — 105.4 in 2022 – inflation has only caused calendar year results to worsen.
“Early results for 2023 show continued deterioration for the commercial auto line, indicating that headwinds are persisting and strengthening,” said Graham.
Progressive remains the industry’s market leader by a wide margin, and although the overall line of business has suffered, Progressive has reported a combined ratio of 90.5 or better in each of the past five years. The report notes that auto accounts for almost all of Progressive’s commercial business. Given the company’s exclusive focus, it has had to be more-effective strategically in underwriting and pricing. For the other insurers, commercial auto may be a loss leader or a diversifying line that is written as part of a package.
Commercial auto insurers face additional headwinds from a shortage of licensed commercial drivers, which forces companies to rely on inexperienced drivers, which in turn could lead to more accidents. According to the report, this is unlikely to be a short-term problem. “Drivers are retiring faster than they can be replaced, which not only adds to the shortage but also shortens the time needed to train new drivers,” said David Blades, associate director, Industry Research and Analytics, AM Best. “Inexperienced drivers could be more prone to accidents, which would worsen accident frequency trends.”