Torts Drive Commercial Auto in Heartland, Elsewhere

Insurers like writing commercial auto business, and most lines of business, in the Midwestern states because of market stability and a favorable legislative and regulatory climate. But even in this typically stable line of business, tort reform is needed to ensure that the market remains stable and prices stay sane.

The Midwest is more competitive because of the many regional carriers competing for the commercial auto business, said Eric Galisdorfer, assistant vice president, commercial auto for Peoria, Ill.-based RLI Corp., which got into the commercial auto business last year. This healthy environment has more to do with legislative and regulatory friendliness than any other regional differences. But even here, the main driver of rates is the tort system, he said.

Commercial auto buyers see lower premiums in Wisconsin, Indiana, Michigan, Minnesota and Illinois, which is nominally more expensive because of Chicago’s more liberal juries. That’s why the recent Minnesota jury award of $720,000 for a loss-of-relationship case came as a surprise to most observers. “That sort of award is shocking for this part of the country,” Galisdorfer said.

“The biggest thing going on in the Midwest region relates to the need for tort reform in the states,” agreed Dave Golden, director of commercial lines for the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill. “Rulings will continue to have significant impact on commercial auto rates.”

A continuing flow of cases
Although the Midwest isn’t experiencing much high-profile litigation, there is a continuing flow of cases that don’t reach the appellate level, Golden said–and commercial fleets are literally a moving target. “If a company has its name on the side of truck, it’s suddenly working with the appearance of deep pockets,” he said. Even more than personal auto, there is a deeper level of litigation in commercial auto in which big-money verdicts trickle down into settlements that are reached out of court, he said.

Naturally, other variables besides tort awards come into play when it comes to the commercial auto market. Catastrophe exposure in states like Florida, Louisiana and Mississippi have caused many standard carriers to withdraw from these markets, and when they pull out of property, auto goes with it, said RLI’s Galisdorfer. However, RLI is continuing to successfully underwrite commercial auto in these regions: “In fact, we view it as an opportunity,” he said.

Still, the Midwest is a more profitable market for commercial auto, he commented. “It’s a very good place to do business–historically profitable, and commercial auto is a line of business that doesn’t fluctuate nearly as much as other lines. It’s not cyclical.”

RLI’s commercial program is licensed in all 50 states. Typical clients include health care customers in which nurses use private vehicles to make house calls, known as “hired nonowned” vehicles. In long-haul trucking, RLI specializes in coverage that can include or exclude exposures that standard insurers typically don’t want to cover, such as a restaurant chain that provided private passenger vehicles for workers for home food delivery. Instances like this are prime examples of how commercial coverage can be specifically tailored.

Term is misleading
However, the term “commercial auto” itself can be misleading, said Brian Sullivan, owner and publisher of Risk Information Inc., a Dana Point, Calif.-based analyst of the property and casualty industry. It’s a catch-all category that includes long- and short-haul trucking, hazardous material transport, delivery van fleets ranging from mom-and-pop businesses to UPS and FedEx, and taxi and delivery businesses that similarly range from small to large.

While Sullivan agrees that tort issues affect the business, he believes it is more of a concern for large trucking firms, which frequently face large judgments. For small fleets, the liability risk is not that different from private passenger auto.

More important have been the changes in the regulatory scene that began in the late 1990s, allowing for deregulation of rate and form filings in commercial lines in general, Sullivan said. Now that most states have modernized their systems, the insurance market in general–and commercial auto along with it–has become more flexible.

In his July 2005 analysis of the commercial auto market, Sullivan called 2004’s results “more impressive than we would ever have imagined,” with commercial auto liability earned premium rising 7.1 percent from the previous year, loss ratios falling from 61.3 percent to 55.8 percent, and physical damage loss ratios of 47.2 percent. Combined loss ratios of both liability and physical damage for the year were 53.6 percent, down from a high of 77.9 percent in 2000 (Sullivan’s loss ratio numbers are losses incurred as a percentage of premium earned).

Examining these results on a state-by-state basis, however, can be somewhat misleading, he cautioned. For example, Ohio’s 2004 commercial auto liability loss ratio was 35.8 percent following a 2003 loss ratio of 22.3 percent. This seems unnaturally low because of recent changes to state legislation reversing state Supreme Court decisions in the late 1990s that expanded coverage, Sullivan said. These decisions were reversed in 2003, allowing insurer profits to rise after loss ratios of more than 120 percent in 2000 and 2001.

Finally turning a profit
Golden agreed that commercial auto rates have stabilized in recent years, after significant liability cost inflation during the 1990s. According to PCI statistics, the countrywide combined ratio for commercial lines auto in 2003 was 100.1 percent, which puts insurers just at the breakeven point.

In fact, the big difference between commercial auto and private passenger lies in liability, Golden said. Commercial auto often covers larger and heavier vehicles that do more damage and produce more severe injuries when involved in accidents.

In spite of the turnaround, however, observers are not seeing any cutthroat competition in the market.

“Over the past two years we have seen a softening in the commercial auto market, but it’s not like it has suddenly cratered,” said Todd Reiser, president of transportation practice group, for Lockton Companies, a Kansas City, Mo.-based broker. “It’s a healthy competition.”

Lockton, with $400 million in revenues and eight core businesses, including commercial auto, primarily writes large-fleet national trucking accounts, most of them among the top 50 of the country’s biggest truckers, Reiser said.

He noted that regionality does have an affect on an account.

“If a fleet does most of its business in the Northeast, it’s definitely more difficult to underwrite than a Kansas City firm with a 500-mile shipping radius,” he said. “Even for a dedicated short-haul operation, it makes a huge difference whether they’re located in Kansas City or New York City.”

Focus on security, hiring and training
Ever since 9/11, trucking firms have been more focused on security, a trend that also helps the industry’s loss control efforts. Heightened security, increased scrutiny of hazardous material haulers, more stringent hiring qualifications and driver safety programs have all contributed to an improved market, Reiser said. Programs like the American Trucking Association’s “Highway Watch,” network of truckers and other highway sector professionals trained to recognize safety and security threats, increases risk management and reestablishes truckers as the “knights of the highways,” Reiser said.

However, the trucking industry’s current driver shortage sometimes means smaller and less financially stable firms make bad hiring decisions. “Getting the right guy in the driver’s seat is the key to mitigation loss,” Reiser said.

Big truckers use a combination of sophisticated training and technology to mitigate loss. Simulators, “skid pads” (devices that train truck drivers to handle a rig in a skid situation), online recorders, satellite link tracking devices and newer collision and tipover warning systems are all improving safety for truckers, Reiser said.

One of the simplest, seatbelt use for truck drivers, is being promoted by a partnership between PCI and the Federal Motor Carrier Safety Administration (FMCSA), which found that only 48 percent of truckers use them.

Global positioning devices, which are in common use by large commercial fleets, combine not only accident data but security information between driver and dispatcher. Real-time information that fleets can use to improve efficiency and safety, such as engine management information that goes through the satellite system to the trucking firm’s maintenance department, contains cost and improves safety, Golden said. This technology, in use to varying degrees by large truckers, is trickling down to smaller fleets, as it is in private passenger auto. (For more on technology and commercial auto, see p. N8)

All of these safety methods have helped decrease the number of accidents per million of truck miles, Golden said. Even though there are more cars and trucks on the road than 10 years ago, the U.S. Department of Transportation’s raw numbers show a declining accident rate.

What’s in the future?
Although the commercial auto market has posted significant improvements in the last several years, the industry is holding its breath on the reinsurance treaty renewals coming up on Jan. 1, 2006, and wondering whether the huge hurricane property losses will leak into other lines of business, said Galisdorfer of RLI.

In spite of this uncertainty, though, it seems the commercial auto market will be less affected than other lines, Galisdorfer said. “We’re still seeking unique opportunities where prices support our underwriting decisions.”