Commercial Auto Agents: Between a Rock and a Hard Market

The cyclical ups and downs of the multisegmented arena referred to collectively as commercial auto are nothing new. Though the years referred to as “soft” and “hard” vary in both length and intensity, the same can be said for virtually all insurance lines.

But going into 2002, with regard to commercial auto the bottom line is the entire commercial market has hardened, and it is experiencing a “capacity crunch.”

“That has to do, in part, with several years of very poor underwriting results, which made the market hard starting in 2000,” said Robert Hartwig, chief economist for the Insurance Information Institute Inc. in New York. “[That] continued into 2001. Then that capacity crunch, those poor financial results, which were coming home to roost in the form of high underwriting losses and leading to higher rates—all that was in force before Sept. 11, which exacerbated the capacity crunch and increased reinsurance costs significantly.”

Companies are now working to reduce their exposure to commercial auto, for which, according to A.M. Best, the combined ratio was 115.7 in 2000. In 2001, the estimate is about 115. The estimate for 2002 is that it might come in at about 110.

Even after the inclusion of investment income, “[t]hat does not allow a company to break even,” Hartwig said. “Some companies have pulled back from this important line of commercial insurance as they have pulled back from commercial lines generally.”

Hartwig indicated that in many states commercial vehicles are often subject to the same laws as private passenger vehicles for insurance purposes, and, therefore, to rapidly rising medical expenses and problems with runaway no-fault costs in states like New York, Florida, Colorado, Hawaii and Massachusetts. Hartwig also noted that in areas of commercial auto, one can observe both the highest jury awards and settlements, and the largest, fastest-growing claims.

The commercial auto marketplace encompasses many lines—and the specialized area of trucking, itself highly segmented, often serves as a model for what is going on in commercial auto as a whole. But even though not everybody who writes commercial auto writes trucks, the trucking industry did experience some very noteworthy changes during the past year.

This definitely creates an environment in which agents, by virtue of their direct relationships with insureds, face significant challenges.

Trucks keep a rollin’
In the trucking arena, “The biggest impact on the market to date has been the loss of a substantial number of competitors,” said Bob Miller, president of Insurance Marketing Corporation of Oregon in the Portland area—the wholesale division of which does a substantial amount of business in California. “The carriers that are left normally were on their way to getting higher rates, and some of them have continued that approach to increasing their rates on trucking.”

Compared to last year pricing trends are now much more uniform geographically. “The trend is all upwards across the country,” said Tom Donnelly, senior director, Transportation at Sentry Insurance, an insurance company in Brookfield, Wis., which, in terms of commercial auto, specializes in for-hire trucking.

Although one hears widely varying examples as to exactly how much premiums have increased, Hartwig estimated it is currently about 20 percent. But going back to the early parts of 2001, 2000 and 1999, it was about 11 percent, 3.5 percent and -2 percent, respectively—a trend, he noted, that is followed by pretty much all commercial lines. “It’s just that post-Sept. 11, some of them are moving ahead much further than others,” he added.

California, here they come… and go
According to some industry observers, California is often impacted more in a tight market than certain other areas of the country for several reasons. First, there are the exposures presented by the freeways, the traffic and the sheer number of drivers. In addition, certain types of physical damage and motor truck cargo have been greatly affected as the theft of cargo and vehicles has reached historical proportions in the last few years.

When insurers decide to rethink their positions, high exposure areas like California are the first states from which they retrench.

“California in a hard market gets impacted much quicker than the rest of the country,” Miller said. “By the same token in a soft market, suddenly a bunch of new companies come on board in California first because that’s where all the premium is.”

According to Donnelly, trucking is an area which easily attracts insurance companies “because the premiums are so high per unit…in comparison to an automobile or a house or even other commercial lines.” However, he added that “unlike a lot of the other lines, it has a much tougher tail to it [which] on a period of three to five years, comes back and hurts those companies that were in it just to generate the premium on the front side. We were hearing examples of companies that had come in and were cheaply priced that now are leaving the market with 180-200 percent loss ratios.”

For overall commercial auto, Hartwig opined that the companies that are going to be in the best position in 2002 are those which can demonstrate superior underwriting results. “Because of the downturn in the financial market, the emphasis is on underwriting,” he said. “For this line to actually generate a return on equity that’s comparable to a Fortune 500-type return—say in the 12 percent range—they need to bring the combined ratio probably to 100 or below. A company that is smart with underwriting and aggressive with pricing is going to be the most successful at the end of this day.”

The impact of 9/11
Another major factor was at play last year. Many believe the repercussions of the 9/11 catastrophe combined with a market that was already hardening created a unique situation in 2001, significantly influencing the number of markets that had been—to varying degrees and for varying coverages—offering insurance products to truckers.

In Miller’s opinion, 9/11 affected the overall market in two ways. “You take what’s conservatively estimated now to be over $50 billion in surplus out of the collective insurance market….It affects the capacity that’s left, meaning both the reinsurance capacity and the direct writing capacity of insurance companies,” he said. Consequently, there was a need for some companies to exit certain classes of business and devote more attention to core businesses, raise rates and overcome in a reasonable length of time the losses they incurred as a result of 9/11.

The other side of the coin is companies which may not have been as directly involved in the 9/11 situation but still have to buy reinsurance. “Some of the reinsurers which were involved raised the reinsurance rates, which means they have to raise their base rates,” Miller said.

While all insurance companies rely to various degrees on reinsurance, the insurance portion of commercial auto is driven largely by reinsurance agreements. “Those reinsurance treaties have a tendency then to push pricing up when there’s only a few reinsurers around, comparatively speaking,” Donnelly explained. “Any line that relies on reinsurance heavily, you’re going to have this conversation—and commercial auto is one of those lines.”

Getting tough on underwriting
Another facet in the current commercial auto marketplace is much more restrictive underwriting. Some observers note that now, as opposed to a couple of years ago, for an account with any degree of problems, the availability of coverage from carriers is extremely limited. From a liability point of view, more business is going to the assigned risk pools in various states because the standard markets will not write the exposure.

“And if that’s for the liability, then it’s for the other two coverages normally purchased by truckers…physical damage and motor truck cargo,” Miller said. “Lloyd’s of London is still writing those at substantially surcharged rates, and there may be some other [miscellaneous] carriers…that are writing those risks at substantially high rates.”

“Underwriters are being very cautious to not lose their reinsurance,” said Bill Clayton, a commercial insurance agent at Transit Insurance in Ontario, Calif. “They’re looking…very closely now [at] activity on a person’s driving record. A lot of insurance companies quite naturally want the best of the best, but you’re not going to always have [that type of] clientele come to you. So you have to be very cautious about knowing your underwriter’s products…and guidelines.”

Is the fact that companies are adhering to more careful underwriting a positive trend?

“It would be positive if it stays with us for a reasonable period of time,” Miller said. “[But] the peripheral, or the smaller, temporary markets that get involved, tend to repress the rates. Their underwriting rules, guidelines and rates are insufficient for the exposure. But they play the devil with the marketplace while they’re in there, not allowing the more experienced or more solid companies who have been in it for a long time to get adequate rate levels themselves.”

Donnelly agreed some companies have tightened their underwriting criteria, but added that what he termed “the traditional commercial auto companies or truck insurance companies” really have not. “They’ve been in this industry long enough [to] know the risk profiles needed in order to generate a profit and, therefore, stay in business,” he said. “Those companies that haven’t been in the market for as long…have adjusted their criteria. That may have been way too loose in the beginning, or they may be going overboard now. But each company has to make that decision for themselves.”

It should go without saying that quality drivers are the biggest variable that can make or break any commercial auto program. Therefore, the selection of these people is highly important. But as the economy has weakened, some businesses which rely on drivers have experienced large employee turnover.

“They would begin to relax the standards of the type of employees they would hire to drive these vehicles,” Miller said. “[Businesses] couldn’t afford to pay wages commensurate with what they may have at one time, or what these same [drivers] can get someplace else. That put a real shortage on qualified drivers. Of course, when that happens accidents go up.” He added that this was particularly evident in the taxicab industry. Tough economic times are especially apparent in the trucking industry. When gas prices soared last year, a trucker may have had to pay an extra $500 or $600 per month on fuel. This created great economic strain on that industry or any employer who owned and operated a large number of commercial vehicles. While fuel prices have since dropped substantially, business failures in the trucking industry were numerous during the last two years.

“From the customer side of the game, agents are now finding there are fewer and fewer clients out there,” Donnelly, said. “In trucking, there are several thousands of bankruptcies occurring in that segment quarterly.”

There are, of course, other risks deemed hard to place in commercial auto, but these vary regionally, and the data is mostly anecdotal. That said, reference is often made to any type of passenger transportation and the aforementioned taxicabs.

However, Hartwig offered a different spin on things. “Taxicabs frequently say that they can’t get coverage, but they do get it. Every group has an interesting thing—cabs in particular are saying, ‘Look, our rates are going up, and, therefore, we need to increase our meter rates.’ But the fact of the matter is that policies are available for fleets and taxicabs and delivery vehicles and just ordinary automobiles associated with the business.

“The fact does remain that the cost is rising in 2002,” Hartwig continued. “It did in 2001, due to all the factors [already] mentioned. The problem’s probably more severe for trucks…because trucks would be more likely to be involved in, or collaterally damaged from, some kind of terrorist incident compared to a fleet of cars or something.”

Will there ever be a morning?
Considering all these factors, is this market at all headed to a point were it can be considered profitable?

“Right now the market is self-adjusting,” Miller noted, adding his belief that there are still a number of companies that have not published or fully owned up to their 2001 underwriting results. “I don’t think we’re going to see that until towards the end of the first quarter. If we are going to get any further adjustments than we have right now, it will happen around then. I fully expect we will lose some more competition by the end of the first quarter of this year when tough decisions have to be made.”

But according to Hartwig, profitability was not in the cards for 2001 and probably, for the industry as a whole, is not in the cards for the first quarter of 2002. “There’s nothing you can do in almost any line of insurance that’s instantaneous,” he said. “It will take some period of time, but the improvement is measurable in the pricing from the perspective of the insurer, and that should manifest itself in a lower combined ratio for 2002. But it takes awhile. It may be a couple of years…for us to know if the line is moving in the direction of profitability or not.

“The fact that the combined ratio no longer spirals upward is one thing,” Hartwig continued. “Companies who look at their data frequently will notice it at least to some extent…in the first-quarter results. But, one quarter does not a year make. Any number of things can happen—underwriting discipline can get lax, pricing can get lax. New competitors can come back into the market if they perceive the market’s getting better, so [companies will] have to monitor this literally on a month-to-month basis.”

Agents in the middle
Miller said that the biggest shock coming to insurance buyers at the moment, particularly those who have had loss problems and other insurance problems, is that during the soft market, availability allowed them to get their insurance replaced. “From a rate point of view, they didn’t pay a penalty for their problems,” Miller said. “Those are the insureds right now that are crying wolf because some are seeing rate increases of 100, 200 percent. But based on their prior loss experience, those are legitimate rate increases.”

But Clayton expressed the opinion that an experienced agent with a good-sized book and several years of renewals with the same consumer is often put into the awkward position of explaining to that long-time client, with no losses during the past two years, why premiums have hit the ceiling.

“Mainly on the commercial side of trucking, consumers…are probably finding more headaches in finding that adequate quote comparing last year’s price to this year’s price,” Clayton said. “[Before] you could go to one company, get a price, [then] go to another company, get a price $500, $600 cheaper. Now you pretty much know who to go to because it’s a matter of what insurance company is going to give you the best service. And that’s what you’re selling to your customers.”

“The toughest thing, in our case, on the MGA-end with the agents we deal with…is that the soft market lasted so long we now have such a high percentage of…agents out there that never lived through a hard market,” Miller said. “Because [of that], they’re taking a defensive position with their insureds. They’re fighting windmills. Instead of addressing the situation as it exists and working within the market—they’re fighting the market. They’re losing, and they’re frustrated.”

Clayton asserted that in this new hard market, it is important to get customers to understand the premiums. And how does an agent do that? “You hope and pray you have a good relationship [and stability] with your client,” he answered. “Like any other consumer, he’s probably going to shop around. Instead of having the renewal done in a timely manner, people are waiting until the last minute…to see if they can save maybe $1,000 or $500 or $800. That gives the whole ball game a different perspective for the customer when every year you’ve been saving the guy relatively a couple hundred dollars. It turns into a problem now. Good losses, good everything—he’s going to pay more money.”

Donnelly asserted that the agencies that did very well last year and are poised to do well in 2002 are those that have strong relationships with not only their clients but also with their companies.

“We’re seeing several of the independent agents, especially in the West, purchasing other independent agents,” Donnelly said. “It’s like the strong are getting stronger, the weak are getting weaker. Those that didn’t have strong relationships with companies and only sold price to clients, lost their clients to price and…didn’t have companies to back them on a value-end of things.

But Donnelly added a lot of agents were used to capturing business by price because the insurance companies were their own worst enemies, “lowering prices during the ’90s so quickly that if you had the market going, you could capture a lot of business. We in the industry…have gotten ourselves into trouble because we lapsed into treating insurance as a commodity.”

Hartwig, noting that the “agent’s always in a difficult position,” emphasized the importance of agents being able to explain to policyholders, in terms they’ll understand, exactly why prices are rising—such contributing factors as the higher cost of providing medical care, rising jury awards, the decline in the stock market, lower interest rates, a lot of underwriting losses, companies pulling out of the market and “the common sense explanation that capacity has been crimped post-9/11. And that, ‘Sorry about the 20 percent increase, but you’ll remember that your policy went down for about six years in a row between 1994 and 1999.’

“Agents can arm themselves very well with good information, and good agents do that all the time.”

Topics California Carriers Auto Agencies Profit Loss Commercial Lines Business Insurance Pricing Trends Underwriting Reinsurance Trucking Market