Recovery in US Commercial Auto Segment May Prove Unsustainable

The recovery of the US commercial auto insurance segment over the past 2 years might prove unsustainable in 2023 and beyond, according to Fitch Ratings.

The rating agency noted that after a decade of annual underwriting losses, the US commercial auto insurance segment reported a below 100 percent combined ratio in 2021. The segment is poised for similar results this year due to growth in earned premiums and better reserve development, Fitch said.

But the segment might be unable to sustain that performance in 2023 and beyond as price increases slow and loss costs move higher, with US inflation likely to increase pressure on such key factors as vehicle repair, medical, and litigation costs, according to Fitch.

"The broader US commercial lines sector has experienced hardening pricing for 3 years, but improvement in results, customer fatigue, and competitive forces are reducing rate momentum," Fitch said. "Commercial auto renewal premium rates have risen for 43 consecutive quarters, per the Council of Insurance Agent & Brokers (CIAB) Quarterly Commercial Market Pricing Survey. However, the rate of increase fell to 5.9 percent in 1Q22 versus 9.0 percent in 1Q21, with 2022 pricing expected to flatten further."

Fitch noted that property-casualty insurer performance has proven resilient in the face of the considerable challenges presented by the COVID-19 pandemic. One unanticipated outcome was sharp improvement in commercial auto underwriting results, the rating agency said, as commercial auto moved to a 99 percent statutory combined ratio in 2021.

The commercial auto segment's statutory combined ratio averaged 108 percent from 2011 to 2019, according to Fitch, due to competitive pricing, less disciplined underwriting standards, and persistent increasing claims severity resulting from greater litigation activity and higher repair costs. Systemic issues that increased claims, such as shortages of trained drivers and increased incidents of distracted driving as dependence on digital devices increased, also contributed to the segment's weak performance, Fitch said.

Commercial auto insurance is the third-largest US commercial lines segment, Fitch said, experiencing 65 percent net written premium growth in the last 5 years.