In a report by Fitch Ratings that examined recent commercial auto performance and market share movement for the largest U.S. commercial auto writers, only four of the top 15 companies reported overall underwriting profitability in the last five years.
However, most of the largest underwriters displayed moderate improvement in results, with 10 of the top 15 companies reporting lower commercial auto combined ratios in 2017 compared with 2016.
Fitch believes the commercial auto segment remains problematic as claim severity challenges and reserve deficiencies limit near-term improvement.
There are broader concerns over profitability weakening further from rising large claims and litigation settlement cost trends in commercial auto spilling over to other liability segments.
As market fundamentals point to several challenges hindering a return to adequate underwriting profits and returns on capital, Fitch maintains a negative sector outlook on U.S. commercial lines overall.
The commercial auto line has generated seven consecutive years of underwriting losses, with the industry statutory combined ratio rising to a 16-year high of 111.1% in 2017.
Fitch says inadequate pricing in the soft commercial insurance market prior to 2011 led to elevated underwriting losses in the years that followed. While More volatile loss trends have consistently plagued underwriting performance.
“Growing larger loss incidents and higher claims litigation costs are exacerbating loss severity, particularly in larger trucking and fleet accounts.” Fitch believes commercial auto insurance premium rates continue to rise in response to these results.”
The Council of Insurance Agents & Brokers’ Commercial Market Pricing Survey indicate commercial auto premium pricing rose 7.7% in 1Q 2018, the highest rate increase in seven years. Written premium volume in commercial auto has expanded faster than other major commercial market segments in the last two years.
Benefits from price increases have been offset by continued claims instability and loss reserve deficiencies. Commercial auto has exhibited the weakest reserve adequacy among major commercial market segments for the last several years, including industry adverse development equal to 5.7% of earned premiums in 2017 and 8.6% in 2016.
Fitch believes there remains significant reserve deficiencies from past policy periods in commercial auto that will be recognised in earnings over the next few years.
On an accident year basis, reported commercial auto loss ratios remain elevated, but have improved modestly over time, falling to 77.9% in 2017 from 80.5% in 2013. However, reserving experience of recent underwriting periods may prove similar to past years.
Fitch estimates the accident-year loss ratio would need to be below 70% in order to reach break-even underwriting results in commercial auto.
