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Why prices are so high, and what to do about it

If your company has tried to renew its commercial auto insurance lately, you already know the market is hard. If you haven’t, be prepared. Pricing for primary commercial auto insurance has been on the rise steadily for the last ten years, with no clear leveling off in sight. We cannot fully realize the total impact of COVID-19 on the commercial auto industry yet, but we do believe that the key trends impacting the market prior to the pandemic are likely to reemerge as the economy reopens.

Frequency of severe losses is the largest contributing factor to the commercial auto market conditions. This is also happening in excess casualty where capacity reductions, increasing attachment points and tighter control over umbrella coverage terms are commonplace. Insurance carriers, in an effort to improve underwriting results and achieve sustainability, are willing to walk away if they can’t get the right price and structure. As a result, brokers are scrambling to help clients fill the capacity gaps created by these changes.

For clients with large commercial fleets trying to buy adequate auto insurance at a reasonable price, the current market is challenging at best. Yet by understanding what factors are contributing to the hard market, buyers can begin to build solutions to address those issues and help reduce their own insurance costs.

Factor #1: Distracted Driving
In 2018, 2,841 people were killed in the US due to distracted driving or drivers. Of the nearly 40,000 fatal accidents per year, 25% of them are the result of distracted driving.

What is distracting drivers? Eating, drinking coffee, changing radio stations or heat settings – anything that takes a driver’s attention of the road is a distraction. One of the larger contributors to distracted driving is cell phone use. An estimated 1.6 million vehicle accidents were caused by the use of cell phones while driving. According to a recent survey from National Institute of Occupational Safety & Health, 47% of commercial drivers surveyed admitted to reading text messages while driving. However, other distractions are equally dangerous – 34% of drivers say they have fallen asleep while driving. Those numbers could well be higher, too. A surprising 24% of surveyed drivers said they’d had a near-miss accident in the past week.

What buyers can do:
Educate yourself and your employees on how to reduce distracted driving. Prohibit cell phone use when drivers are behind the wheel and implement strong disciplinary measures and penalties to deter the behavior. Make sure your drivers know what the penalties are for noncompliance. Also, consider the use of telematics to monitor drivers’ behind-the-wheel behavior and employ coaching for drivers when behaviors don’t match policies and procedures.

Factor #2: Shortage of Qualified Commercial Drivers
In 2018, there were 60,800 unfilled jobs in commercial driving, an increase of 10,000 over 2017. By 2030, that number could swell to 160,000 open positions. With the average age of today’s trucker being 46, the shortage will continue to challenge the industry for what could be the next few decades. With fewer experienced drivers on the road and less experienced drivers filling the open positions, more accidents are bound to happen.

What buyers can do:
In a tight labor market, employers need to do all they can to appeal to job candidates. Have a modern fleet with collision avoidance technology and driver behavior technology such as in cab, forward and rear facing cameras. Establish a mentorship program to help train new hires. Plus, demonstrating that your company is leading with safety and employee wellbeing can help attract a wider pool of job seekers.

Factor #3: Increased Road Use – Pre COVID-19
There were more people on the roads up until the pandemic began. As the economy recovers, this is expected to resume. The estimated miles driven in 2019 totaled 3.225 trillion, up exponentially from the 12.2 billion miles driven in 2017. Increased travel leads to increased road density and increased risk of accidents. 

What buyers can do:
As drivers are on the road more often, companies that employ them can implement stronger safety measures. Increase driver training frequency. Build and explicitly follow strong policies that prohibit long shifts behind the wheel. Adjust contracts with clients to assure drivers are not meeting unrealistic expectations. Install monitoring equipment in every vehicle, and actively address behavioral/ non-compliance issues as they arise.

 

A common theme in large verdicts and settlements is evidence of a driver’s or company’s failure to follow their own policies and procedures.

Factor #4: Increased Severity of Claims
Motor vehicle deaths in 2019 totaled an estimated 38,800. Fortunately, that marks a 2% decrease in fatalities from 2018. However, the average cost per fatality is $4.8 million. Medical costs for those injured in accidents are increasing, and the cost of vehicle physical damage repairs and replacement are also rising.

Another reason for the increased claim severity: litigation and third-party litigation funding. Third-party litigation funding is a practice where a third-party funds litigation or arbitration in exchange for a share in any proceeds should the case be successful. According to a Burford Capital survey of US Law Firms, third-party litigation financing increased from 7% in 2013 to over 36% in 2017, with expectations that the trend upward will continue.

A common theme in large verdicts and settlements is evidence of a driver’s or company’s failure to follow their own policies and procedures. This makes a case harder to defend, leads to larger settlements and if the case gets tried, it tends to anger a jury and make the corporate defendant less sympathetic. In a juror’s mind, failure to follow policies and procedures equals taking short cuts which also equals putting profit before safety.

Also, social inflation, or the increase in losses associated with legislation, litigation and other social and economic factors, has been increasing claim costs for nearly 20 years. Large jury awards set a precedent that forms a baseline for subsequent verdicts and settlements in similar cases. As an example of this inflation, the average auto-related jury verdict increased from $30 million in 2015 to $54 million in 2018.

What buyers can do:
In a market in which insurers are taking a microscopic view of a client’s risk portfolio, buyers can gain the confidence of their carriers by showing an active approach to managing risks. Mitigating losses before implementing insurance solutions can help reduce greatly your own costs associated with losses, as well.

Use telematics to reduce driver distraction. Implement ongoing, regular training. Establish and strengthen your safety programs and communicate them regularly to your employees. Regularly review your drivers’ motor vehicle records to determine any violations or fines. Have clearly defined parameters on what triggers will cause drivers to lose their driving privileges. And for any non-owned vehicles, create standards that the vehicles must meet to be used in your operations.
Also, show your insurer you are actively trying to determine the root cause of any accidents. Triage each accident. Did the driver report it following your company’s reporting plan? Are any of the findings of your investigation something you can improve on going forward?

One of the best preventions is employing a culture of safety in your organization. Make education, training, and support widely available to all your employees. Furnish your drivers with safe, well-maintained vehicles. And make sure everyone in your organization is committed to safety. Create safety teams to spread the message regularly to all employees.

Better Operations, Better Underwriting Results
The hard commercial auto insurance market may remain for some time to come, but you are not without options to help reduce your risks and your insurance premiums. As frequency and severity continue to push pricing upward, your company can make its risk portfolio more appealing to underwriters by showing a clear understanding of the risks, by demonstrating a pattern of staying on top of the issues, and by investing from the top down in building a strong safety culture. 
Work with your insurance carrier and broker to assess your level of risks, and to identify key areas of concern. Then use the resources available via your carrier, broker and technology providers/associations to build mitigation strategies that can reduce your auto liability risks.

Also, remember that safety begins once a driver is hired. Developing a thorough hiring and screening process can net you more qualified employees. By appealing to a broader base of candidates through per-hour pay and more employee wellbeing initiatives, you can fill vacant positions with a higher caliber of driver.
Safety requires a holistic approach. By making it an integral part of your operations, you can reduce your vulnerabilities. A strong emphasis on training, combined with ongoing risk management reviews and updates, can keep your company’s exposures to a minimum.

 
  • About The Author
  • Chief Underwriting and Strategy Officer, North America GRM, AXA XL
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Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

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