Is commercial auto a market bellwether?

26 November 2018

Among all the debate about pricing in the market and whether there has been a significant shift towards a harder market, one line of business is undoubtedly showing rate increases.

The US commercial auto market has been rising, and continuing to rise. According to the Council of Insurance Agents & Brokers1, commercial auto rates increased 8.2 percent in the second quarter of 2018, the 28th consecutive quarter of increased rates.

For the rest of the market, the increases are relatively small, ranging from 1 percent to 2 percent, with the exception of workers’ compensation, which has seen a continuing fall in rates.

The question is whether commercial auto is a bellwether for the rest of the casualty market, or a special case due to particular circumstances.

Certainly, the commercial auto market has faced a difficult period in recent years, with big increases in losses both in terms of frequency and severity.

“Many believe that the actual rate levels needed were camouflaged due to the recession,” says JJ Johnson, Executive Vice President, JLT Re (North America).

“It was difficult for companies to recognize the level of rate increases that were actually needed, and the pace of increased frequency and severity of claims was greater than any rate corrections taken. Most significantly, in trucking.”

He explains that industry experience for commercial automobile calendar year development showed a dramatic and swift deterioration of reserves beginning in 2012, leading to a number of big players withdrawing from the market in one form or another in the past two or three years.

Looking ahead

In the short term, the commercial auto market is expected to remain hard, largely driven by the scale of the reserving deficiencies in the sector.

“We are seeing a perpetuation of a hard and further hardening market. Almost all insurers that write commercial auto report are taking underwriting action on their business, either in the form of rate increases, re-underwriting or nonrenewal of policies/portfolios,” says Johnson.

“Insurance rate increases are now outpacing loss trends. Commercial automobile liability can be regarded as a true hard market.”

But further ahead, are the rate increases in the sector sustainable? “The insurance market cycle is alive and well, so we expect rate increases to slacken and eventually reverse,” says Johnson.

“There may be intimations of reduced momentum in commercial auto liability rate increases in recent commercial lines market surveys, but rate reversals are not yet on the horizon for the average commercial auto program.”

Backing up this view, he points to the example of trucking accident frequency, which jumped 10 percent year on year in the first quarter of 2018.

He says this may have been a short-term blip, a result of a temporary mismatch in supply and demand for truck drivers that have driven longer driving hours and contributed to higher accident rates.

“Underlying this, we continue to see a mismatch between average primary policy rates and longer-term trends in loss frequency and severity, and thus expect rates to continue to strengthen in aggregate although with more differentiation by program,” says Johnson.

“Competition from new entrants and increased capacity from existing players will dampen rate increases, of course, although we expect underwriting discipline to generally reflect the economics.”

Wider casualty market

Clearly, the number of major players that have exited from the commercial auto liability market has probably contributed to the strengthening in that class, but many of the other factors are reflected in the wider casualty market – higher frequency and severity of claims, resulting in poor accident year underwriting results, and growing loss reserve deficiency.

As a result, Mark Shumway, Global Head of Strategic Advisory for JLT Re, says: “We expect general commercial casualty and specialty rate increases to continue steadily if not increase for the short term, particularly where we continue to see gaps between expected returns and gross [pre-reinsurance] costs of capital for insurance carriers. Carriers’ margins are not yet reflecting the rate strengthening, overall.”

He notes that workers’ compensation is an exception to this trend, where the market is still seeing strong positive results overall and rates declining in aggregate, despite rising medical loss costs and deteriorating accident year underwriting margins.

Speaking at the Monte Carlo Rendezvous event in September, Swiss Re’s Group Chief Underwriting Officer, Edouard Schmid, said he believed an inflection point in the pricing cycle for non-life insurance has been reached.

“For 2019, we broadly expect stable rates provided no major event happens this year. Underwriting margins in major non-life insurance markets need to improve more to deliver sustainable returns on equity,” he said.

Commercial auto liability may not be an exact bellwether for the wider market, but it is perhaps suggesting the direction that the market requires, at least in the short term.

Above all, the message from the commercial auto liability market, and increasingly the casualty market in general, is that the underwriting cycle is alive and well.


1        Commercial Property/Casualty Market Index Q2/2018 - The Council of Insurance Agents & Brokers (www.ciab.com/download/15391)

 

CONTACT US

JJ Johnson
+1 336 603 5250
jj.johnson@jltre.com

Mark Shumway
+1 215 309 4535
mark.shumway@jltre.com