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What Drives Commercial Auto Insurance Costs?

by Precise Leads

August 22, 2017

Distracted driving is one reason behind the rise in premiums. But there are others.

Many of your commercial auto insurance clients likely experience sticker shock when they see the rise in their annual premiums. According to the IVANS Index, which tracks premium renewal changes, commercial auto rates rose 2.41% by the end of June, followed by a 3.28% hike in July.

Yet despite pushing up rates, auto insurers continue to suffer staggering losses; State Farm, for example, booked a $7 billion auto underwriting loss in 2016. A recent article in Forbes detailed another factor impacting auto insurers’ profit margins: the combined loss ratio — an equation that tabulates the relationship between underwriting losses (and other business expenses) and written premiums.

In 2010, the top ten insurance companies registered an average direct combined loss ratio of was 99.7%, a percentage that resulted in slender profit margins. Last year, the average ratio skyrocketed to 107.1%, meaning that major insurers lost 7% on their earnings from auto insurance.

Behind those numbers, several economic and societal shifts have driven the escalation in commercial auto insurance rates. A reversal of some of those trends could help auto insurers return to profitability.

More vehicles on the road: According to the Federal Highway Administration, travel on American roads increased to 281.2 billion miles in May 2017, an increase of 2.2% over May 2016. With cumulative travel for the year to date rising by 1.7%, American vehicles will have driven billions of miles by the end of the year. The greater number of cars on the road greatly ups the odds of accidents happening.

Driving distracted: Unfortunately, many drivers have their hands on their smartphones instead of the steering wheel. A 2016 State Farm survey revealed that 35% of drivers admitted texting while driving. Unsurprisingly, serious accidents happen when a driver’s attention isn’t focused on the road. The Centers for Disease Control reports that distracted driving kills nine people and injures more than 1,000 every day in the U. S.

Costlier accidents = costlier claims: Today’s cars are manufactured with more expensive materials and outfitted with high-tech devices. Consequently, the cost to repair damaged cars has risen significantly. Liberty Mutual noted in the Boston Globe that the price tag to repair a “minor fender bender” on an entry-level luxury car now stands at well over $3,000.

Fewer experienced drivers: An article in PropertyCasualty360.com asserts that commercial fleet operators have turned to less experienced drivers due to a shortage of skilled commercial drivers. Lack of solid driving skills leads to more crashes.

Less investment income: Though not related to road behavior, auto insurers have seen their income from investments dwindle in recent years, which, in turn, has forced them to raise rates to recoup those lost dollars. Insurers typically invest in bonds to receive a fixed income. However, due to low interest rates, bonds have returned a meager 2.6% since 2008 versus an average ROI of 4.6% between 2002 and 2007, reports Value Penguin.

How Agents Can Help

Insurance agents can’t take cars off the road, especially for those clients whose businesses depend on vehicles. But there are measures you can explore with your client to ease the sting of rising premiums and control insurance expenses.

First, stress the importance of hiring experienced drivers and giving them the proper training. Your clients can also install telematic devices in their vehicles so they can monitor their drivers’ behaviors. If they notice unsafe patterns, fleet operators can quickly address the issue. Safer driving habits may result in fewer accidents, and therefore lower rates.

You can also discuss with your client the possibility of upping the limits on primary and excess commercial auto policies. The current threshold of $1 million may be insufficient to cover today’s repair costs, PropertyCasualty360.com points out. Increasing the limit may be beneficial for you client.

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