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Commercial Auto Insurers Map Out Path to Profitability

Posted By Joyce Anne Grabel, Thursday, March 28, 2019


In a short but memorable scene from 2017’s “Logan,” the title character happens upon a crash involving a horse trailer and a fully autonomous truck. The movie is set in the near future — 2029 — and its dystopian vision shows both the solutions (no driver shortages) and the problems (crashes!) facing the commercial auto insurance sector as autonomous vehicle (AV) technology evolves.

The high cost of climate change

The increasing frequency and severity of weather events due to climate change has led to a significant increase in damage risks and costs — with increasingly severe weather forecast every year. And the results of climate change aren’t limited to the obvious, such as crashes directly linked to snowstorms or losses from flooding. The causes can be more subtle. For example, a new study by Massachusetts Institute of Technology scientists found that roadway fatalities increase as temperatures rise.

“Hurricanes, floods and hail storms are leading to higher auto physical damage loss ratios, especially for those insureds with high-value concentrations of vehicles,” says Jonathan Charak, assistant vice president & actuary, Technical Underwriting — Pricing at Zurich North America.

Driven by such increased losses, commercial auto rates have continued to rise over the past few years, and industry professionals expect them to continue to increase for some time. “The loss results in commercial auto have been running high during this time, which has caused steady rate increases,” says Steve Shepard, underwriting manager, Transportation, at Burns & Wilcox.

Physical damage will continue to be a challenging exposure, with loss severity increasing for the foreseeable future, predicts Charak. He notes that auto physical damage deductibles have not kept up with repair costs and loss trends. He expects that insurers will look to right-size these deductibles on commercial fleets as part of the overall strategy to improve results.

Chris Moulder, vice president at Worldwide Facilities, says that the market continues to face pricing pressure from adverse results driven by distracted driving, medical cost inflation and “seismic” jury awards.

To reduce distracted-driving events, more companies are implementing technology solutions. “Cost continues to be a factor that weighs heavily in the decision to adopt the technology,” says Shepard. “The larger fleets tend to have more funds to be able to invest in advanced technology at this point.” He predicts, however, that with continued development and acceptability of the technology, the industry will start to see cost reductions.

“While advanced driver-assistance systems should bring about positive safety changes, they are becoming more common and complex. This will lead to increased repair costs in a way similar to what we have seen in recent years with widespread back-up camera usage” says Charak.

Pairing technology and underwriting

The commercial auto insurance industry is closely following the development of autonomous vehicle technology, which is expected to expand the opportunities significantly. Shepard believes that AV will have a positive impact on the industry, helping to drive its evolution. He predicts that AV technology will become more acceptable, readily available and cost-effective.

Autonomous vehicles will necessitate a fresh underwriting perspective, says Charak. “Overall loss frequency is expected to decrease — and, potentially, loss severity in the future.” He expects the causes of loss will also change. Instead of being worried about 2017 Market Share Report a speeding vehicle on an icy morning, future risks are likely to include handover from AV to human driver, or a failure of an autonomous system.

As legislation develops along with AVs, there may be shifts in liability. “Recent industry studies expect there to be a diminishing demand for auto liability and an increase in products liability, cybersecurity and infrastructure,” Charak says. He explains that a highly automated vehicle will rely on radar, light detection and ranging (lidar), cameras, graphics processing units, and central processing units to analyze the imagery. New risks arise from potential systems failures due to a faulty part, improper installation or inaccurate calibration.

According to Moulder, coverage enhancements particular to the AV industry are not commonplace yet but are being worked on by several carriers. “We are seeing autonomous risks across a wide range of applications.” He notes that warehousing and logistics applications involving yard trucks are becoming popular, along with such low-speed electric vehicle technology applications as local-radius parcel, grocery or food delivery within a mapped environment.

Within the commercial segment, over-the-road AV deployments are still in the future; however, it won’t be unusual to see product developers testing their technology on public roadways — on their own or in partnership with fleet owners, Moulder predicts. “Agents and brokers should be prepared to face these issues during 2019 as more and more companies begin to test their products on public roadways, and as more jurisdictions pass legislation allowing for that testing,” he says.

It’s important to keep in mind that AVs will not be the panacea everyone is hoping for, says Rick J. Lindsey, CEO of Prime Insurance Company. “Everyone is hoping autonomous vehicles are going to reduce accidents and improve claims results, and I think that’s naive. We will just have different arguments and claims. We’ve insured autonomous vehicles and have been watching, and we haven’t seen claims go down yet.”

Filling empty driver seats

One enormous challenge facing commercial vehicle fleets is the attrition of experienced commercial drivers as baby boomers reach retirement age, coupled with a lack of job candidates who have the skills and expertise needed to drive safely. According to research by the American Trucking Associations, the trucking industry is currently understaffed by more than 50,000 drivers, and this could increase more than threefold within eight years if current trends continue.

According to Shepard, it’s been difficult for insureds to recruit and retain talented and experienced drivers. “This is a major issue,” he says, “considering roughly 75% to 80% of the goods on store shelves have been transported by a truck at some point.”

To help mitigate the risks associated with newer, inexperienced drivers, Shepard advises insureds to consider implementing pre-employment screening in addition to telematic safety tools. He notes that using pre-employment screening during the hiring process helps determine a driver’s inspection and accident history. “Often, this includes information that is not provided in their motor vehicle report,” he says.

Many commercial fleet operators are either partnering with accredited commercial driver’s license training schools that provide in-depth driver training courses or developing their own comprehensive driver training programs in-house. Moulder observes that while more truck fleet operators are building internal driver training programs to recruit young drivers to the industry, most truck insurers prefer certain minimum age and driving experience requirements, which may not be met by some trucking companies.

“For large fleets with sophisticated risk management programs, insurers may be willing to waive certain minimum age and experience requirements,” he says. “For small and midsize fleets, they may need to trade their desire to hire inexperienced drivers for higher insurance rates or surcharges.”

If you work at it, you can find people. “They’re good-paying jobs,” says Lindsey, who notes that some fleet managers are reaching out to former military members. “A lot of companies won’t underwrite drivers with less than three years’ experience, but we’re willing to underwrite new operations with younger drivers if we feel they have the proper skills and training.”

High losses, physical damage, developing and unproven technologies, and operator shortages are the primary challenges facing the commercial auto insurance industry in 2019 and further down the road. But they don’t have to become roadblocks if insurance professionals know what to watch out for.

Untapped telematics potential

As driver distraction continues to play a key role in loss frequency, growing numbers of fleet managers are continuing to evaluate camera- and telematics-based systems to give them better insights into driver behavior. “The availability of camera systems has become more widespread and affordable for fleet owners over the past decade,” says Chris Moulder, vice president at Worldwide Facilities.

According to Jonathan Charak, assistant vice president & actuary, Technical Underwriting — Pricing at Zurich North America, risk managers and fleet managers alike have embraced the technology as a powerful way to improve safety and driver behaviors while gaining operational efficiencies. “But there continues to be reluctance on the part of some insureds to share their telematics data with insurance providers,” he says. “This has created a lot of untapped potential in the value that insurance providers can bring to telematics users in the form of safety training, behavioral insights, data analysis, predictive modeling and premium consideration.”

Steve Shepard, underwriting manager, Transportation, at Burns & Wilcox points out that insurers offer credit or cost saving to insureds that invest in telematics and other technologies designed to improve vehicle safety. “I have seen an increase in the use of telematics, drive-cam and distracted driving technology, such as lane departure and anti-rollover. Insurance companies have indeed looked favorably on this type of investment by the insureds. The natural question is, ‘What is the cost of the tech, and will that cost be offset with insurance savings?’”

Some insurers are offering free or subsidized camera systems in exchange for the ability to review data associated with those systems. “I believe we will see a rapidly advancing trend where insurers favor certain telematics systems and partner with new telematics providers. This will enable these insurers to aggregate data and then derive information that will allow them to better evaluate and price coverage into the future,” Moulder predicts.

In his experience, Rick J. Lindsey, CEO of Prime Insurance Company, has found that a lot of companies are afraid of telematics because they’re concerned about data not being in their favor. “We don’t tell companies they have to put cameras in their vehicles, but it helps us save money on claims by knowing the truth,” he says. “We don’t want to ignore the facts. We want to settle as soon and as cheaply as possible. Increasing litigation is driving up rates. If insureds go to lawyers, it will increase costs.”

Lindsey says that he wants insureds to make the right decisions for their businesses. “They’ll pay lower premiums if they make good decisions,” he says.

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