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How adverse losses affect commercial auto insurance rates

By Higginbotham on December 03 , 2020

Commercial fleet

Commercial auto insurance rates are rising. According to Business Insurance, commercial rates were up in every line of coverage in the third quarter of 2020, and commercial auto rates in particular were up. The CEO of MarketScout says that the aggressive rate increases are expected to continue in the fourth quarter.

You might feel like there’s little you can do in response to this trend, but that’s not exactly true. While overall market conditions will impact your rates, your company’s loss history is also a major factor in determining not only your rates but also whether underwriters are even willing to offer coverage.

Some Background on Hard Insurance Markets

The insurance industry cycles between hard and soft markets. When the market is hard, it means that insurers have paid more in claims than they’ve collected in premiums, so they have to increase rates and become more selective with risk selection.

Hard markets affect all accounts – not just those with poor loss ratios. We had been in a soft market for several years, so this hard market may feel a little harsh. Those of you without losses, may be surprised by your rate increases. Those of you with poor loss experience may have difficulty getting any insurance offers. Either way, now is the time to prepare. As an independent agent, with relationships with many carriers, we at Higginbotham can help you navigate, but it’s important to start early.

Claims Frequency and Severity

Accidents happen – but if they happen a lot, you should expect your rates to increase accordingly. Insurance underwriters look at two things in your loss history: frequency and severity.

Frequency refers to how many claims you have in a period. A history of frequent claims may indicate unsafe practices and habits, which could make future claims more likely, so this will have an adverse impact on your rates.

Severity matters, too. A claim for $1 million will have a bigger impact than a claim for $1,000, for example. And be warned – the potential for severity is getting worse. Recently, jury verdicts have been increasing in a trend known as social inflation. Some verdicts – often called nuclear verdicts – have been for jaw-dropping sums.

The trucking industry has been especially hard hit by this trend. Property Casualty 360 says that verdicts are frequently surpassing $10 million. According to Claims Journal, trucking insurers have lost approximately $1.8 billion since 2018 because of multimillion-dollar settlements and verdicts and related factors.

Cleaning up Your History and Preventing Nuclear Verdicts

Right now, commercial auto rates are going up across the board, and there’s not much to be done about that. However, preventing claims is still important. If your company has experienced excessive losses, you might have trouble obtaining coverage in the current market. Underwriters typically use a three-year look-back period when evaluating your loss ratio, so keep this in mind.

If your company has not experienced excessive losses, that’s great – but you should still brace for rising rates. Additionally, the social inflation trend means you shouldn’t relax quite yet. With nuclear verdicts on the rise, a single loss can be devastating.

Take steps now to prevent claims and to prove that you’re taking safety seriously.

  • Safety starts with the hiring process. Hire safe drivers and use drug testing.
  • Ongoing training is needed. Provide training and reminders on key safety issues.
  • Embrace safety technology. Telematics systems can monitor drivers for unsafe habits, allowing these habits to be corrected BEFORE an incident occurs.
  • Practice what you preach. Saying that drivers should practice safe driving won’t mean much if your actual day-to-day operations don’t promote safe driving. Make sure that your policies don’t inadvertently promote speeding, distracted driving, drowsy driving or other dangerous practices. Also make sure that safety is prioritized consistently at all levels in your company.
  • Document everything. If an incident occurs, you may need to prove that your company has been taking proactive steps to promote safety.
  • Work with your agent to regularly review open claims. Make sure they are progressing toward resolution and that they are not over-reserved.

Finally, start preparing for your commercial auto renewal early so your agent has time to shop the market and advocate on your behalf. Contact us to learn more.

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Tags: Risk Management

  
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