Have you noticed a spike in the rates your company pays for commercial auto insurance? You are certainly not alone.
California business owners in particular are experiencing some of the most drastic changes, with most insurance carriers reporting increases of 5-15 percent for 2017 renewals. So what’s behind the underwriting decision to pinch consumers? Some of the reasons are intuitive, while others may not be.
To understand this trend we need to first take a step back to the year 2008. If you recall, that’s when the economy took a nosedive. With that downturn came millions of job losses, folding businesses and, of course, less of a market demand for commercial auto insurance.
As insurance carriers fought to hold onto that market share, underwriting standards were relaxed and premiums were slashed. There the prices stayed … until just recently.
Insurance pricing is largely based on how the market performs as a whole. Take the commercial auto insurance market for instance. A key performance for the insurance industry is the combined ratio, which measures profitability by dividing earned premium into losses and expenses. In other words, the lower the combined ratio, the better that market performed for the insurance company.
From 2011 through current, U.S. auto insurance carriers experienced an eroding combined ratio creeping well above 100 percent, to the currently projected 109 percent for 2017. Simply put, the commercial auto insurance industry expects to lose 9 cents for each dollar earned in premium this year. This seems to be the tipping point for carriers, who can only expect to make up so much of that 9 percent underwriting loss with investment income.
So far, we know that poor underwriting performance is to blame for the sticker shock, and that poor performance is driven by increased underwriting expenses and commercial auto losses. Why so many losses? Well, that’s where the rubber meets the road, so to speak. Here are some primary factors:
Distracted driving, which is to blame for over 3,000 deaths per year according to the CDC, has increased the frequency and severity of auto losses. Of the 400,000 injuries that occur each year due to distracted driving, 15 percent of those injuries are associated with commercial vehicle accidents.
Cheap fuel prices, which have hovered between $1.75 and $2.50 for the last few years, means more miles driven. More drive time (especially distracted drive time) equates to more accidents and injuries.
The improving economy, which continues to post modest job gains, generally equates to more employees behind the wheel of company cars and trucks. When premiums remain flat but there are more drivers and vehicles exposed to the hazards of the road, it does not bode well for that combined ratio we discussed earlier.
Increasing medical costs don’t help the situation either. The average cost of bodily injury claims in auto accidents increased somewhere between 30-40 percent over the last decade in large part to rising medical costs.
Higher prices may be the new reality, but most underwriters are able to apply discretionary credits when calculating premiums, which creates an opportunity for businesses to take some of the bite out of their bill. Here are some ways to improve claims experience, protect human and other assets and keep premiums down:
Driver screening is a critical component to safe operation of a fleet. DMV records should be pulled by your insurance agent before any driver is allowed behind the wheel of a company car. It’s important to go the extra step by requiring the employee to release that complete record for your review as well.
The driver might be “acceptable” per underwriting standards since he has no serious violations, but that doesn’t mean there are no red flags such as a pattern of distracted driving violations. Underwriters will reward businesses who take a proactive approach to managing over the road exposures, and might consider additional credits if that employer is enrolled in the DMV Pull Program. The Pull Program notifies employers whenever a driver is cited by law enforcement, and ensures that drivers who exhibit unsafe behavior are brought to the attention of the employer sooner rather than later.
Monitoring devices are a staple of best-in-class fleet programs. Commonly known as telematics systems, these tools help monitor speed, braking, location, aggressive maneuvers, etc. These systems can be set to alert stakeholders in real time when unsafe driving patterns are detected by the telematics system. Businesses can also install dash cams that record for set periods of time before and after a collision. These tools can help improve driver safety, increase accountability and foster a culture of safe behavior.
Investments in driver training will, of course, pay off in the long term, but for an organization with poor claims experience, it can also pay off in the short term.
When underwriters consider pricing, one of the key factors is past claims experience. If your agent is arguing for premium relief despite poor claims experience, the underwriter will want to know what’s different today vs. when those accidents occurred. It’s critical to be able to point to a renewed commitment to driver safety, as evidenced by enrollment in driver safety training.
As the auto market continues to firm up, remember to ask your agent about some creative ways to mitigate the increases. It’s often helpful to have mid-term meetings with your risk management professional to assess trends, market conditions, claims status, and other factors that impact premium. At the very least, then you can begin to project future costs and build those into your upcoming budget.
–Nelson Aldrich is an insurance broker with WISG Insurance, headquartered in Turlock. He can be reached at [email protected]