The U.S. commercial auto insurance segment faced a substantial setback in 2022, with underwriting losses skyrocketing to $3.3 billion, as revealed by a recent report from AM Best.
This downturn came on the heels of nearly breakeven results in the previous year. Commercial auto insurance has persistently been one of the most underperforming sectors in the property/casualty industry since 2012, consistently recording a higher combined ratio than the broader property/casualty commercial lines industry.
However, in a surprising turn of events, 2021 saw an improvement in the combined ratio, dropping below 100, thanks in part to reduced traffic on U.S. roads during the COVID-19 pandemic.
AM Best emphasises that long-standing challenges for commercial auto insurers, such as social and economic inflation, continue to exert a significant and lasting impact on the sector.
Christopher Graham, Senior Industry Analyst at AM Best, notes, “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. Even with that, though, the physical damage combined ratio is deteriorating.”
The report also highlights that commercial auto insurance pricing has steadily risen over the past decade but hasn’t kept pace with inflation.
Additionally, adverse development on prior-year losses has contributed to a higher combined ratio, reaching 105.4 in 2022, exacerbated by inflationary pressures.
“Early results for 2023 show continued deterioration for the commercial auto line, indicating that headwinds are persisting and strengthening,” warns Graham.
Progressive continues to dominate the industry by a significant margin, maintaining a combined ratio of 90.5 or better for the past five years.
Notably, commercial auto insurance constitutes the majority of Progressive’s commercial business, necessitating effective strategic underwriting and pricing.
In contrast, other insurers may view commercial auto as a loss leader or a diversifying line within a larger package.
In addition to these challenges, commercial auto insurers are grappling with a shortage of licensed commercial drivers. This shortage forces companies to rely on inexperienced drivers, potentially leading to an increase in accidents.
According to the report, this shortage is not likely to be resolved in the short term, as drivers are retiring faster than they can be replaced, intensifying the driver shortage and accelerating the need for training inexperienced drivers. This, in turn, could worsen accident frequency trends.
