Commercial Auto Claims on the Rise – Are Rates Next?

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by Amy O'Connor

An increase in claims from cargo theft and freight physical damage is expected to lead to higher insurance rates in the commercial auto class, a welcome development for some insurers after years of prices going down.

“Commercial auto premiums countrywide and industry wide have actually declined year after year since 2008. At the same time insured policyholder retention has gone up; there is less new business starting and less new business policies being sold,” says Scott McCrae, vice president of Fireman’s Fund Commercial Insurance Division in Novato, Calif. “Insurers are really working hard to keep customers and offering discounts to customers that have been with them for a while so there are fewer customers around.”

Overcapacity has been a major issue in the commercial auto segment because of the extremely soft market and the shrinking insured marketplace.

“The soft market attracted new capital and many of the standard companies expanded their appetite to commercial auto. Some of that new capacity wasn’t well seasoned and was driving prices down in this segment,” says Mike Hamby, executive vice president of transportation practice group leader for Swett & Crawford in Seattle, Wash. “At the same time the economy was having its effect and many companies were having a difficult time keeping their doors open.”

Those carriers that came into the commercial auto market to try to make some easy dollars may now be having second thoughts as claims are increasing and growth in the freight industry has slowed.

“The [commercial auto] marketplace for the last few years has had everything against it from fuel prices that are really high to not really the freight they needed,” says Sandi Fritz, vice president of transportation and branch offices for J.M. Wilson Corp in Portage, Mich. “A lot of carriers didn’t post good loss numbers for last year – freight and cargo claims are through the roof.”

Veterans of the commercial auto market hope that the combination of claims and shrinking capacity along with an improved economic climate will help turn around this class.

Swett & Crawford has begun to see an increase in miles driven and the frequency of trips, which are positive signs, says Hamby.

Fred Jefts, vice president of transportation for Swett & Crawford in Portland, Maine, says the new venture and start-ups segment of commercial auto in particular has begun to tighten up.

“That group is having difficulty both from a capacity and pricing standpoint,” he said.

Fritz says J.M Wilson has also noticed a change recently. “Freight is up so that is good and that’s going to change rates a little bit,” she says. “There are signs of improvement so we are cautiously optimistic that it is getting a little better.”

However, any talk of rate hikes is premature at this point, according to McCrae.

“The most recent industry data suggests that the frequency of loss – how often accidents are happening – is starting to increase and the average cost of settling these claims is starting to increase as the cost of repairing vehicles is going up and the cost of labor is going up, so that is an early indicator that things are changing. But prices aren’t starting to go up at all,” he said.

Fireman’s Fund has seen first-hand the negative effects of the current market. It launched a hybrid grade “green” endorsement in 2008 that enables businesses to upgrade to a hybrid model or the equivalent during the first three model-years in the event of a total loss. But the response has not been as good as it hoped.

“Because of the economic conditions, less small business customers are buying add-on coverages than they have in the past so response has been less then what we anticipated but we think that has more to do with the economy,” McCrae says. “The commercial auto class itself has been pretty hard hit by the economy so typically small businesses are buying coverages they need and not lots of extras.”

However, the company is planning ahead. It is currently in the process of revamping its commercial auto program using data analytics to review program design and pricing. It hopes to begin filing at the end of the year and release to the industry by 2012. The revised program will be available in all the states that the carrier does business in.

Swett & Crawford will be partnering with a carrier that is a new entrant to the commercial auto market, which it plans to announce at the end of June. The market will be wholesale dedicated and Swett & Crawford thinks it will help it compete.

Its merger with Cooper Gay has given Swett & Crawford international opportunities along with a stronger London market presence than it had previously. Swett is looking to open new areas for transportation within the U.S. at the end of the year as well.

Hamby says agents who partner with a general agent in the current market have a distinct advantage and Swett looks for agents wanting to form these relationships, rather than those shopping only on price on every account.

“That is the challenge in an economy where people are struggling. There is validity to partnering with a solid general agent,” he said.

Fritz says when it comes to commercial auto, especially trucking, agents have to understand the industry.

“On the trucking side, you find agents who are more specialized. Either you write it or you don’t; it is not something you dabble in,” she said. “And one of challenges is to be sure you ask for a lot of information from clients. I am not sure [agents] understand how important that info is in the pricing of the account and the whole underwriting scheme.”

Jefts says Swett is committed to the agents who work hard in this segment.

“We are looking for retailers that are serious in the market segment,” he said. “If they are serious in the market segment, we can help them with the things they need to know if they don’t know them already.

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