The speed, the climb, the drop and the turns…rollercoasters are an exhilarating thrill! But if the rollercoaster is commercial auto, some insurers will be happy to see the end of this ride.
It’s no secret the commercial auto line is still feeling the pain of increased severity and rate inadequacy. Nearly a year ago, Carrier Management stressed this point, citing higher litigation costs and larger loss incidents as causes for unfavorable claim trends. Despite rate increases, 2016 was the worst year for underwriting performance since 2001, with combined ratios growing 1.6% to 110.4% from the previous year. A recent A.M. Best report reaffirmed this and found 2017 to be equally as difficult, with rate increases of 5.4 percent, 6.1 percent, and 7.3 percent, in the first three quarters, as insurers tried to match the pace of losses. The report continues with the grim outlook, “there will be more pain – owing to factors such as distracted driving and attorney involvement- before insurers realize any long-term gains from focused underwriting and pricing efforts.”
While the uncertainty of the situation may be unsettling, about 20% of commercial auto carriers are turning an underwriting profit on this line. What do they know that others don’t and what are they doing differently? More importantly, will it remain at 20%? Or, 18 months from now will we see the number of profitable insurers grow?
If we take personal auto as an example, there are several indicators of how this will likely play out. For the past six years, profitable personal auto insurers have attributed their success to the adoption of data analytics. To beat adverse selection, they have effectively leveraged data to choose the right risks, for the right price. This example has also played out effectively in work comp, with the top carriers vying for market share over the last 5 years.
Independent rating agencies like AM Best and Fitch agree: insurers that fail to adopt the advanced analytics and enhanced data to make competitive decisions will be unable to compete. It boils down to those that have incorporated analytics, and those who have not. It’s up to insurers to face uncertainty head-on and make investments in the future.
Learn how one commercial auto insurer fought adverse selection and improved their loss ratio by 29 points in our case study.