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12 December 2017

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Commercial auto results may get worse before improving: AM Best

David Bull 13 December 2016

Underwriting results on US commercial auto business may get worse before corrective measures by carriers have any meaningful impact on performance, AM Best warned today.

In its latest update on the loss-struck segment, the ratings agency said that despite quarterly rate increases and attempts to re-underwrite and re-price portfolios, the line has continued to be a "loss leader" for many insurers.

"Decisions could be forthcoming from some carriers, including those that have long been committed to this line, about whether writing less volume is the correct strategy at present, at least until keys to augmenting performance can be clearly identified.

"Nonetheless, the challenges will remain numerous for companies for which commercial automobile is a lead line of coverage and makes up a material portion of their overall book of business," said the firm.

AM Best pointed to the recognition of prior-year loss reserve deficiencies on the business by carriers as "another troubling indicator".

"Until increased pricing helps stabilise current accident year loss picks, results may get worse before measures insurers are currently undertaking yield any meaningful impact on underwriting results, if that occurs at all," it continued.

On a calendar year basis, commercial auto underwriting has been unprofitable since 2010, according to AM Best data, with the segment recording its worst combined ratio in the run last year, at 108.6 percent.

The agency said that premium increases over the past decade had not been sufficient to counteract the negative impact of rising calendar year loss ratios on underwriting profitability.

Based on surveys from the Council of Insurance Agents and Brokers, commercial auto rates have been climbing on a quarter-to-quarter basis since Q3 2011.

But those increases have come after earlier years were "severely underpriced" in the eyes of many industry commentators, suggested AM Best.

The firm said that written premium totals from 2013 onwards have reflected the higher rates, including increases of 3.6 percent, 2.4 percent and 3.2 percent in the first three quarters of 2016.

But, AM Best said: "It is evident that commercial automobile direct incurred losses over the last three years, on a quarterly basis, have been increasing to a larger degree than direct premiums written."

As previously reported, challenging conditions in the commercial auto market have led to significant retrenchment or withdrawal by some carriers, most notably AIG and Zurich.

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