21 May Commercial Auto Sees Best Results in a Decade, but Future Profits Remain Uncertain
The commercial auto industry reported the best underwriting result in a decade, with a 26% decrease in total reported claims.
Further, the combined ratio of 101.6% for 2020 was nearly 8% better than the 2019 rate. However, the sector’s future profitability may be challenged as driving activity returns to normal, according to a recent report from Fitch Ratings.
The State of Commercial Auto
Years of large rate increases and a sharp decrease in driving activity caused by the ongoing COVID-19 pandemic contributed to positive commercial auto results for 2020. Rate increases are expected to continue through 2021 at a decelerating rate of increase. Net written premiums showed less than 1% growth in 2020, compared to 9% growth in the prior year, causing some market experts to say commercial auto prices have plateaued.
In general, poor performance in commercial auto can be attributed to rising claims severity associated with increased litigation activity and larger jury verdicts. Research indicates that jury verdicts in excess of $1 million and $10 million are one of the main sources of commercial auto loss volatility, according to the report. Higher costs from rising litigation activity and larger jury verdicts and settlement costs are likely to weigh on profits in the future.
The cost of vehicle repairs continues to rise, as technology becomes more sophisticated and expensive to replace, and rising medical costs have increased the severity of bodily injury claims, according to Fitch Ratings.
“Large losses are inevitable for commercial auto insurers, particularly those focused on large fleets and long-haul business,” according to the report from Fitch Ratings. “However, efforts towards more judicious risk selection, lower policy limits and higher policy deductibles serve to offset volatility.” Increased digitization and improved virtual communication capabilities—a result of the shift to remote work in 2020—created many opportunities for commercial auto insurers to increase efficiency and enhance performance in areas of pricing, risk selection, and claims management.
Developing claims practices that can identify and mediate claims with higher litigation potential may also help reduce the severity of some auto losses. Greater preparation for trials, including gathering expert witnesses and jury consultants, and staging mock trials could also help offset high jury verdicts.
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