Fitch: Commercial Auto Insurance Underperformance Drags On

Fitch Ratings-Chicago-01 June 2017: The U.S. commercial auto insurance industry in 2016 reported its worst underwriting performance since 2001 and the segment continues to create a profit drag for U.S. property/casualty insurers, according to a new report from Fitch Ratings. The industry underwriting combined ratio in commercial auto insurance reached a 15-year high in 2016 to 110.4%. The segment has produced an underwriting loss for six consecutive years, following a long run of underwriting profits.

"Despite premium rate increases in 2016, commercial auto insurance results continued to deteriorate as unfavorable claims trends promote continued high loss ratios and increased adverse reserve development," said James Auden, Managing Director, Fitch Ratings.

The industry remains plagued by prior-period loss reserve deficiencies. Inadequate reserving is symptomatic of poor pricing and slow recognition of shifting loss trends. Adverse development in 2016 equaled 8.6% of earned premiums, a recent high watermark for segment reserve deficiencies.

In contrast to most commercial insurance segments, which have recently been experiencing significant renewal premium rate declines, commercial auto prices are rising at an accelerating rate in response to these poor results. Fitch expects premium rate increases to continue for commercial auto insurers going forward.

Minimal improvement in accident-year loss ratios in the last three years could foreshadow a shift towards better results in 2017. Reported accident-year loss ratios for 2016 were 76.7% for the industry, three points better than the weakest recent underwriting year, 2013. Still, a return to underwriting profits in commercial auto remains unlikely in the near term.

"Better data analytics and technology could boost the commercial auto insurance industry in the future as harnessing a wider body of information through development of more sophisticated algorithms and models could help improve underwriters' risk selection and pricing." "Predictive claims models can improve effectiveness at identifying large claims that are likely subject to litigation, or for signaling circumstances that are indicative of fraudulent activity." added Auden.

Underwriters are hopeful that investments in newer technology will foster greater efficiency and underwriting performance improvements. Companies that lag behind in innovation will likely face risk of adverse selection in their underwriting portfolio and expense disadvantages. Developments in sensor technology and telematics, which are more widely used currently in personal automobile insurance, provide great opportunity to monitor driver behavior and incorporate this information into premium rates.