Building Profitability into the Commercial Auto Market

Like most property and casualty insurance lines, the commercial auto insurance market has witnessed rate increases over the past year and expects to see more. And, as in other lines, underwriters are scrutinizing accounts more closely than they have been in the recent past, demanding complete, accurate, timely submissions in the effort to drive the market back to profitability.

The higher rates, a reaction to years of under-pricing and lowered underwriting standards that translated into higher loss ratios, run the gamut between “small” hikes to pricing increases in the 100 percent-plus range, depending on who’s doing the estimating.

“Texas is in a very interesting point right now in that the commercial auto market is definitely hardening,” said Judy Young, commercial auto product manager for Progressive Insurance in Texas. “If you look historically over the last five years, what’s happened is that loss ratios have been climbing… So in order to make an underwriting profit, a number of carriers are going to raise rates to bring their loss ratios back to profitable levels.”

Robin Stough, president of RISC Inc., a managing general agent headquartered in Dallas, said prices are on a definite upswing. “The state of the marketplace right now is really unsettled, to be generous, on the transportation side,” said Stough, adding that rates “are going up pretty dramatically, and they have been for about a year, year and a half now, and they’re continuing to rise.”

Janice Farmer, senior underwriter for transportation at Austin-based The Insurance Marketplace, agreed. She noted that around October and November of 2001 rates jumped 20 to 25 percent in the surplus markets. On Jan. 1, commercial auto benchmark rates rose an average of 4.6 percent statewide (9.3 percent – physical damage, 3.1 percent – liability) with an effective date of Feb. 1. Farmer expects to see rates rise throughout 2002 as standard companies file for rate increases-they are allowed rate flexibility to go 30 percent above or 30 percent below the benchmark-and the surplus markets continue their quest for profitability.

According to Kevin Curley, president of Curley Insurance Group, an independent agency located in Dallas, a lot of standard companies have started to file for rate increases in the 15 to 20 percent above-benchmark range, but those increases haven’t fully kicked in yet. He expects prices to rise for the rest of the year.

What’s hot, what’s not
The commercial auto line is broadly categorized into three groups-business auto, trucking and public auto-that are further divided into sub-classes according to the specific nature of the insured’s business.

The difficulty in placing coverage varies, depending on the type of vehicle, who’s driving it and what it’s used for. Some lines are definitely harder to place than others.

First, the bad news. “Anybody who’s involved in the oil and gas business, in the heavy construction business-a lot of those folks have no choice but to go to the E&S (excess and surplus) market for auto,” Curley said. He added that tractor trailer trucks are a problem, since the standard markets generally won’t handle them, and noted that taxicabs are a class of vehicles for which coverage may be difficult to find.

Non-owned or leased car exposures can be problematic, according to Insurance Marketplace’s Farmer. Companies are leery of writing physical damage for hired and non-owned business because they don’t want that exposure. “We will write (hired auto) for umbrella purposes or if they have a contract-say they work for Exxon and they have to have it because Exxon won’t let them on the property without it,” Farmer said. “If they are doing a lot of leasing, the hired car exposures are pretty high-(the companies) are going to charge for it and it will be broken out separately on the policy and audited at the end of the term.”

Another business standard companies are avoiding is tow trucks. “There are some people who aren’t even accepting (towing risks),” Young said. “In terms of Progressive, we’ve tried to keep all our markets open, but I do know there are several carriers that have shied away from the tow business in Texas.”

The good news is that business auto: contractors, wholesale-retail delivery, companies that are carrying their own commodity or tools; and public auto: limousines, social services vehicles, adult day care centers, motel/hotel shuttles, etc., are areas that insurers are not only willing to write but are finding to be profitable.

“We just have one program, it’s a business automobile program,” said Al Parraga, vice president of underwriting for Strickland Insurance Group, a North Carolina-based carrier that writes a considerable amount of its business auto business in Texas. The program targets service unit vehicles that are parked at a job site most of the day. It is designed for contractors, both local and intermediate. Parraga said business auto is a line that remains competitive. “You have a number of standard carriers that are trying to attract this business still. Unlike long-haul, it historically can be written profitably. That’s one of the reasons we target it.”

RISC has also found the business and public auto sectors to be rewarding, although the company also writes coverages for trucking enterprises such as flat-bed freight, general freight, containers, refrigerator freight, and oil and gas. Jim Parker, RISC’s vice president and transportation manager, said the key to profitability is underwriting an account according to the specifics of what that account is doing.

“If they’re hauling something-what that load is they’re hauling, whether they have expertise enough to know how to load and unload what they’re carrying-whether it be heavy machinery or lumber or public auto. With wheelchair lifts-have your drivers been properly trained in how to load and unload and secure handicapped people in the vans? So it’s going to depend with each one, on specifically what they’re doing, on the questions you’re going to ask (as to) how you are going to underwrite that account.”

Young said Progressive remains open to a variety of commercial lines, but has a concentration of accounts in the business auto area in Texas. “We have a stronger presence in… what we refer to as our light, local market,” Young said. “But we do also a very strong presence in the trucking market and we try to price competitively in both.”

Farmer also writes a lot of business and public auto policies, especially coverage for physical damage to the vehicle itself and the property being hauled. Contractors, dump trucks, day care centers, church vans and motor truck cargo are among the types of risks that she handles. And, she’s recently seen an increase in applications for household goods carriers.

Profitability is in, so is less coverage
According to Parker, rates for some coverages have doubled during the year. He noted that a year ago, a contractor operating a dump/tractor trailer truck in Dallas or Harris County was paying about $3,000 for a half million dollars in liability insurance. Now, that figure is likely to fall between $7,000 and $9,000. For a single tractor trailer in Dallas hauling for hire, the current rate is about $5,000. Last year it would have been closer to $2,500 or $3,000. For insurers, those increases translate into profits.

“When you look at the size of the premiums we’re writing versus the same accounts a year ago, the increase in premium is astronomical,” Parker said. “Anytime you can get that much more premium it’s going to decrease your loss ratios, which in the long run will make more profit for the company.”

But for the insureds, the increases may come as a shock. How are they handling them? According to Curley, “Not well.” He acknowledged that with the economy in a downturn, business and revenues of some commercial auto customers are down as well, and increased rates are eating into whatever profit is left.

Consequently, a lot of customers “have tried to increase deductibles, reduce physical damage coverage-that’s two of the things they are doing to get their premiums down,” Curley said. “Some are dropping physical damage altogether… On the liability side they don’t have much flexibility because they’ve got to have it.” He noted that for commercial accounts, it doesn’t “make sense to drive around in the state of Texas, especially in the urban areas, without at least a million dollars in liability… People recognize that… So instead of buying a million dollars in physical damage they’re trying to reduce the premiums there dramatically. If they have a huge increase, some of them will take the physical damage off of any vehicles that are older than four or five years old, or any vehicle that’s not financed.”

Changing market share?
As some companies become less willing to take on borderline risks, the nature of the market may change. Regulated companies still command the lion’s share of the commercial auto market in Texas, but county mutuals, which are not subject to rate regulation, captured more than a quarter of the total market share in 2000.

Although excess and surplus providers accounted for just under six percent of the commercial auto market in 2000, premium totals jumped dramatically for E&S companies in 2001, especially for liability coverages. According to the Surplus Lines Stamping Office of Texas (SLSOT), in 2001 the E&S market wrote over $47.2 million in commercial auto liability premium compared with about $34.3 million in 2000, an increase of nearly 38 percent. For physical damage coverages, E&S companies saw an increase in premium of more than 18 percent, from $47.9 million in 2000 to $56.6 million in 2001. Figures for 2001 for regulated companies and county mutuals are not yet available.

As to how high rates will go, it’s too early to speculate. What is clear is that insurers are determined to turn a profit in underwriting commercial auto by methods that include not only rate increases and stricter underwriting standards, but in some cases, avoiding high-risk exposures altogether.

Topics Carriers Texas Auto Profit Loss Commercial Lines Business Insurance Excess Surplus Louisiana Underwriting Agribusiness Trucking Contractors Oklahoma Arkansas