October 29th, 2018

Solutions for Improving Profitability in the Commercial Auto Liability Line - GC@PCI Commentary

Posted at 1:00 AM ET

durant_nick_photo_0088-croppedNick Durant, Managing Director

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  • Unexpected acceleration in claims frequency related to increased road mileage and congestion
  • Insurers use sophisticated models to analyze new and existing data for optimized pricing and risk selection
  • InsurTech solutions are emerging that permit insurers to price their risks with more accuracy

One of the major factors affecting property/casualty industry profitability in the United States in recent years has been the poor performance of the commercial auto liability (CAL) line. On both a Calendar and Accident Year basis, industry CAL underwriting results have been deteriorating for the past decade. Accident Year combined ratios have been above 105 percent since 2010, and carriers are feeling the pressure to reverse this trend. Related lines of business such as umbrella, have also felt the adverse effects of challenging loss trends driven by CAL. It is an open question regarding which will arrive first: autonomous cars and trucks or underwriting profits for CAL writers, believes Nick Durant, Managing Director, Guy Carpenter.

A number of developments are contributing to CAL results: the first is the unexpected acceleration in claims frequency related to increased road mileage and congestion. “The explosion in ride sharing plays a pivotal role in increased exposure and loss emergence,” says Durant. “Additionally, as the internet economy and on-line purchasing grow to levels never anticipated, more trucks and delivery vehicles are sharing the roads, causing congestion and increasing the potential for more accidents.”

He adds, “The second major development impacting claims is the increase in distracted driving from use of cell phones and Global Positioning Systems devices. According to recent studies, phone distraction is now the cause of more than half of all car accidents. While drunken driving statistics remain historically low, there have been increases in impaired driving using marijuana and other drugs.

“Third, CAL claim severity is growing to higher-than-anticipated levels and contributing to continued unprofitable underwriting results. The increase in large jury awards due to trends in the plaintiffs’ bar influences growing claims severity along with factors like medical cost inflation, aging or inexperienced drivers and the differences in the sizes of vehicles involved in accidents. Although carriers have been aggressively raising their rates, the increases have not been adequate enough to bring the combined ratios down below 100 percent.”

To achieve improved profitability and growth in CAL, insurers need to review the challenges and take bold steps to turn them into opportunities. Insurers must focus resources on implementation of improved underwriting and pricing functions. “On the underwriting side, this will encompass everything from managing limits appropriately to attaining reinsurance covers that address both frequency and severity of loss,” Durant says. “For carriers that write commercial package policies or multiple casualty lines, they should avoid the temptation to use CAL to oversubsidize other casualty lines such as workers compensation and general liability.”

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Turning to pricing, Durant believes that although data sets and modeling tools for auto liability are growing exponentially, the ability of carriers to mine usable, strategic information from that data and then integrate it into underwriting, pricing and claims strategies is being strained to the limits.

“Insurers are using increasingly sophisticated models to analyze new and existing data in the search for optimized pricing and risk selection,” he adds. “Public filings data from, for example, the National Transportation Safety Board, and third party sources present a rich data set for understanding markets and drivers. These items may include: industry miles driven, new commercial truck sales, road density information, fuel prices, impact of new vehicle technologies and repair cost indices.”

Insurers can achieve better underwriting by building and leveraging a comprehensive data collection plan that captures vehicle type, driver demographics and motor vehicle records and using the data for predictive modeling.

InsurTech solutions are also emerging that permit insurers to price their risks with more accuracy and allow more robust risk mitigation practices. Durant notes, “Telematics can help insurers deploy behavioral profiling for auto insurance that enables pricing that is dynamic and elastic. Advanced Driver Assistance Systems have become more prevalent as tools to warn drivers in advance of potential accidents or hazardous situations.”

Durant concludes, “Guy Carpenter’s broking, Analytics and Strategic Advisory teams are dedicated to providing each client with data and tools for a tailored approach that addresses its unique challenges and create opportunities for improved underwriting performance and optimal reinsurance solutions.”

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