For the seventh consecutive year, commercial auto is losing money. Despite rate increases in 23 of the last 25 quarters, the combined ratio topped 111 percent in 2017. The line has been a weak spot for many insurers, forcing them to reduce writings, trim their portfolio and—in some cases—exit writing monoline auto altogether.
While these traditional approaches have had some impact, they have fallen far short of turning this line around. For one, they work from the assumption that the problem lies mainly on the front end, in underwriting. Our studies show that there are pockets of opportunity across the enterprise when you look at the business from end to end.
Claims, underwriters, actuaries and loss control staff all claim ownership when results are good. But when results are less than desirable, it’s hard to find an owner. It’s a textbook illustration of the expression, “Success has many fathers, but failure is an orphan.”
Root Cause: What’s Going On
There are many theories as to why auto loss costs are on the rise. One of the challenges is that these unfavorable trends are occurring along multiple dimensions. It’s not a question of frequency or severity; it’s both. It’s also not a question of coverage part, as the increase in costs can be seen in both liability and physical damage.
Factors that have been offered to explain the increase in frequency are, to name a few:
Increase in miles driven due to an expanding economy and lower unemployment.
Firms finding it harder to hire experienced drivers to handle growth and retirements.
Fewer vehicles sitting idle due to improving economic activity.
Increase in distracted driving.
Some reasons attributed to the increase in severity are:
Higher speed limits causing more severe accidents.
More expensive vehicles with advanced technology.
Increase in litigation and new approaches by plaintiffs’ attorneys.
Historical patterns and relationships are changing, making it harder for underwriters and actuaries to identify risk and to price for exposure. As newer cars and trucks work their way into the population, the changes listed above make it hard to measure the impact of technologically advanced automobile safety devices. It’s believed that these safety advancements will change the nature of risk and bend the loss curve, driving down frequency but raising severity due to increased repair costs.
On the positive side, there are many new tools available today to help underwriters get a better handle on exposure and behavior. Analytics are ramping up every day, telematics—at least in personal auto—are providing great insights, and companies are getting better and better at segmented pricing.
Suggested Quick Hits
Update practices and processes to deliver designed results.
Review and address: skill, knowledge, performance gaps.
Gain new insights from existing data to improve triage in claims and underwriting.
Enhance dashboards to improve utilization and performance.
Is Your Pricing Matched to Exposure?
Most commercial auto rating plans are class-based and, while models can price for driving history, credit record, loss history, type of vehicle, etc., they do not capture items such as miles driven and where. The best companies are developing strategies to get a better handle on exposure and try to match price to exposure. For example, insurers in the trucking market are using public data such as gas tax receipts to get insight into where vehicles are going. This could eventually lead to route or trip pricing down the road.
Telematics are providing personal auto insurers a wealth of information, but we’re a long way from universal adoption, especially on the commercial vehicle side. Companies with larger fleets employ these devices for their risk management but are not ready to share that information with insurers.
The challenge for underwriting is determining if the increase in the number of claims per policy or per insured vehicle reflects risk selection, or if it’s simply reflective of an increase in exposure such as miles driven. In the first case, you might implement tighter underwriting standards. In the latter, you may realize that you have a mismatch in pricing to exposure. We see substantial evidence to support that underwriters are responding to lagging information and that the increases in rates are trying to catch up to the increases in utilization and miles driven.
Do you have to wait to purchase expensive new technologies and data analytics? The short answer is no. In the absence of usage-monitoring technologies, some companies are using reporting forms to stay on top of exposure, some are utilizing their audit departments, and others are using loss control on larger accounts. What all these companies have in common is trying to gather richer, quicker data to help them better match pricing to exposure. They are segmenting their book and targeting the areas where they suspect they have the most leakage exposure.
More Systemic Near-Term Actions
Bring/expand focus on opportunities and threats into data warehouse and models.
Augment models with increased external data.
Develop plan to increase usage-based pricing.
Evaluate specialist or segmented structural alignment in claims and underwriting.
Are You Only Watching the Front Door?
Underwriting is not alone when it comes to dealing with the rise in auto loss costs. We have delivered substantial work with claims organizations over the last couple of years aimed at getting a handle on rising claims costs in automobile. Commercial auto cases are getting more complex and tougher to handle.
For example, physical damage claims used to be very straightforward, but now they are more challenging just to estimate. Locating qualified independent appraisers is becoming more difficult. Today, a small fender bender can be a substantial claim due to damage to sensors and other electronic devices. Loss-of-use costs require vehicles to get repaired and back in service with even greater speed.
Increased vehicle costs, higher limits and broader coverage are all straining the experience and skill level of claims departments. Many carriers have grown their commercial portfolio and expanded into new classes of risks that require adjusters with greater expertise and skills. Often companies look at market opportunities and go into new areas without preparing other parts of the organization to deal with more complex cases or classes of business. The thought might be that you have a year to worry about the claims coming from a new target market. With auto, you may not have that time luxury.
As we talk to claims leaders, they voice concerns on the liability side. Plaintiffs’ attorneys are pushing the envelope and finding ways to produce larger verdicts and settlements. For example, studies show that there has been a significant increase in cases claiming traumatic brain injury from a collision. These are adding substantial costs to claims and require claims departments to step up to the challenge.
More and more attorneys are being successful in shifting liability from the individual to the employer. In the spirit of “no good deed goes unpunished,” plaintiffs’ attorneys can now access motor vehicle safety data, GPS data, webcam information, etc., to support their cases. All these developments are putting stress on claims operations to do deeper investigations along with customer expectations to do them faster. The best claims operations are using data and their top adjusters to identify these cases and develop a proactive game plan to combat these trends.
Another factor we see contributing to the poor auto results is adverse prior period development. These changes—particularly in litigation trends, vehicle costs and medical costs—are exceeding reserve estimates and impacting current results. We’ve seen an increase in leakage on the claims side as well due to these current trends and developments. The best claims operations are assessing how comfortable they are with their current case reserves and implementing systematic open file reviews to make sure their estimates are keeping up with current trends.
Deep Change to Business Model
Define future needs for core system support: speed integration for new technologies and analytics.
Expand value-added features and services for customer.
Move out of silos in use of integrated models, data and system-based decision-making.
Develop a long-term business intelligence approach.
Top Performers Are Doing Well
Industry results can be deceiving. The belief that a “rising tide will raise all ships” is not true. With respect to commercial auto, the difference between the top performers and bottom quintile is almost 30 points. The loss and expense ratio for the top quintile of carriers averages 89 percent, while the bottom quintile is running a hot 118 percent. Some carriers are doing well in this environment. They’re capturing rate increases, staying on top of exposure growth in underwriting, and have beefed up their analytics and claims departments. As exposure growth eventually levels out, they will be poised to ride rate increases still coming in from lagging data and enjoy even better returns.
You don’t have to wait for the technology silver bullet. We see the top carriers identifying the things they can do now, building around their best people, training the next wave of talent, and laying the foundations for future system and technology advances. We see these and other practical, near-term actions that can be taken to improve commercial auto performance both in the short and longer term.
This article was originally published by Carrier Management, the Wells Media publication for P/C carrier executives.