US commercial auto insurance losses continue to mount: AM Best

The overall property and casualty (P&C) industry continues to be negatively impacted by the US commercial auto insurance sector, having accumulated over $10 billion in net underwriting losses in the last two years, according to a new AM Best report.

For the 14th consecutive year, the commercial auto insurance sector has generated an underwriting loss, driven by factors such as rising loss severity and adverse prior-year loss reserve development.

The Best’s Market Segment Report, “Stuck in Reverse: Commercial Auto Losses Keep Mounting,” highlights that losses are getting worse: total underwriting losses in 2024 were $4.9 billion dollars.

Over the past 11 years, the average annual underwriting loss has been slightly over $2.9 billion.

“One bright spot to note is that during the past decade, insurers have trimmed about six percentage points off their underwriting expense ratio for commercial auto insurance,” said Christopher Graham, senior industry analyst, AM Best.

Adding: “While commercial auto insurers are not recognized as often as personal auto insurers for adopting and leveraging technology through their operations, commercial auto insurers have nevertheless made some strides in improving their efficiency.”

According to the report, despite these negative trends, there is a notable difference between the performance of commercial auto liability and physical damage coverage.

The underwriting expense ratios for both coverages are relatively similar, both having improved by about three percentage points compared to six or seven years ago. However, the net loss and loss adjustment expense (LAE) ratio has typically been much higher for liability coverage.

This difference between compulsory liability coverage and optional physical damage coverage may lead insureds to view physical damage coverage as not being cost-effective.

“Even if insureds find benefits in physical damage coverage, they may opt for higher deductibles to pay less for coverage,” Graham said.

The report highlighted that the unfavourable underwriting results are driven by incurred losses, and noted a number of key contributors: social inflation, adverse loss development, and pricing increases.

According to AM Best, social inflation continues to be a major force behind loss development on open claims, which has led to increased claims costs.

Average loss severity for commercial auto liability claims has more than doubled between 2015 and 2024, at an average annual rate of over 8%, far outpacing the annual economic inflation of just over 3% for the same period.

This is due in part to outsized verdicts that have set precedents and led to lawyers getting involved in even simple claims.

Regarding adverse loss development, David Blades, associate director at AM Best, stated that it has been “a constant drain on commercial auto results and is getting worse.”

According to the report, adverse loss development has averaged over seven points on the calendar year loss & DCC ratio over the last 10 years.

AM best believes the industry remains under-reserved by $4 billion to $5 billion for commercial auto liability, setting the stage for another year of poor results.

Although pricing has been increasing for 14 consecutive years, with most increases in the upper single digits or double digits, insurers have not been able to keep up with loss cost increases.

This struggle is largely due to rising loss severity, increased claims, and adverse prior-year loss reserve development, according to the rating agency.

Notably, the underwriting expense ratio has declined by six percentage points over the past decade, which is a positive, the report stated. This improvement has prevented overall underwriting results from being worse.

Despite the challenges, some insurers are faring better than the industry as a whole, while other major players are struggling – 14 of the top 20 commercial auto insured had a combined ratio over 100 in 2024.

“Commercial auto has long been seen as a ‘loss leader’ to many insurers-a line for which tighter underwriting margins and the risk for potential underwriting losses are tolerated as a risk associated with gaining access to the more profitable commercial lines, mainly the general liability and the workers’ compensation business. Continued losses in commercial auto insurance may have insurers rethinking this strategy,” the report concluded.