The Rising Cost of Commercial Auto Insurance

Over the past decade, the commercial auto space has been challenging and largely unprofitable for insurance carriers. According to a recent report from AM Best, commercial auto underwriters saw more than $22 billion in underwriting losses between 2011 and 2020. This is despite underwriters increasing commercial auto premium pricing for 41 consecutive quarters, dating back to Q3 of 2011.

Various factors have led to this poor underwriting performance, including litigation trends, a profound commercial driver shortage, a wide range of driver safety failures, medical treatment inflation, distracted driving, surging accident expenses and a deteriorating public road infrastructure. In this environment, many commercial auto insurance carriers have elevated premium costs—with some policyholders experiencing double-digit rate increases. Even amid premium surges, as an industry, insurance carriers have not returned an underwriting profit for commercial auto lines in over a decade.

Looking ahead, industry experts predict that this hard market will continue to be a concern in 2022 and beyond. As such, we predict that the majority of businesses with commercial auto exposures—regardless of their industry or vehicle class—will have a more difficult renewal process by way of greater premium rates, lowered capacity and more stringent policy requirements or restrictions. Further, insureds with larger fleets or a poor loss history may experience more significant rate increases.

Developments and Trends to Watch

  • Nuclear verdicts—Settlement verdicts for bodily injury claims have been rising steadily. Specifically, nuclear verdicts—which refer to jury awards in which the penalties exceed $10 million—have become increasingly prevalent. According to recent Advisen loss data, the percentage of trucking awards exceeding $10 million jumped 15% over the past four years. These large losses accounted for 35% of all trucking losses over $1 million from 2017 to 2021. This is a notable increase from the previous eight years when trucking awards over $10 million accounted for just 20% of losses over $1 million. Due to the rise in nuclear verdicts, attorneys are more inclined to go to trial. This extends litigation and significantly raises the cost to defend a claim. What’s worse, the surge in nuclear verdicts over the years has contributed to many commercial auto insurance carriers either decreasing their risk appetites and restricting coverage offerings or exiting the market altogether. As a result, insureds impacted by nuclear verdicts are less likely to have sufficient coverage for these events—potentially leading to financial devastation when they occur.
  • Driver shortages—According to the American Trucking Associations (ATA), there is currently a driver shortage of more than 80,000 positions—largely fueled by the aging workforce, a declining interest in the profession and certain industry barriers. Making matters worse, the ATAestimates that 160,000 commercial driver positions could be unfilled by 2030. In fact, the trucking industry will have to recruit nearly 1 million drivers within the coming decade to adequately replace retiring drivers and fuel sector growth. The driver shortage is so profound that the White House’s recently passed federal infrastructure bill includes funding for an apprenticeship pilot program intended to encourage commercial driver’s license holders under the age of 21 to operate in interstate commerce. Amid this shortage, many organizations have had to lower their driver applicant standards to fill open positions. These drivers often have fewer years of experience and shorter driving records. Such factors can make these new employees more likely to be involved in an accident on the road. Driver shortages have also forced some organizations to compete for experienced drivers.
  • Distracted driving issues—Distracted driving reduces awareness, decision-making capabilities and overall performance on the road—increasing the likelihood of driver error, near-crashes or crashes. Data from the National Highway Traffic Safety Administration (NHTSA) indicates that, every year, up to 391,000 people are injured, and 3,450 people are killed in crashes involving distracted drivers. As a whole, distracted driving incidents account for nearly 10% of all fatal crashes on the road. In addition to loss of life, these crashes cost an estimated $46 billion each year. As these incidents have become more prevalent, commercial auto insurance costs have climbed in tandem.
  • Marijuana legalization exposures—In recent years, a growing number of states have legalized recreational marijuana and other cannabinoids. More than one-third of the country currently permits the use of recreational marijuana for adults ages 21 and older. As more adults are able to use marijuana, however, there have been concerns over how such legalization could impact road safety. After all, research from the Insurance Institute for Highway Safety showed that crash rates surged in several states—including California, Colorado and Oregon—following the legalization of recreational marijuana. Furthermore, NHTSA data found that cannabinoid use among fatally injured drivers has more than doubled over the last decade. While all states have some form of legislation in place regarding marijuana-impaired driving, many enforcement limitations still exist due to minimal drug-detecting technology and the lack of a widely recognized impairment limit. Going forward, more states are expected to address recreational marijuana usage within their drug-impaired driving programs—making it crucial for organizations to ensure compliance among their drivers.
  • Crash severity concerns—One of the main culprits of surging accident costs (and subsequent commercial auto claims) over the years is worsening crash severity. Even though fewer drivers were on the road in 2020 due to the COVID-19 pandemic, the NHTSA reported that an estimated 38,680 individuals were killed in motor vehicle crashes throughout the year—representing a 7.2% increase from the previous year and the highest annual death toll since 2007. Such crashes have been linked to a rise in unsafe behaviors behind the wheel (e.g., speeding and neglecting to wear a seat belt). As more drivers returned to the road in 2021, the country’s fatal crash rate continued to climb—rising by an additional 3% in the first six months alone. Although the federal government wants to combat road fatalities by investing further in driver safety initiatives, these incidents remain a pressing concern. Besides fatal crashes, road incidents resulting in severe injuries have also contributed to rising accident costs. This is because such injuries often require multiple doctor visits, complex procedures (e.g., surgery) and advanced treatment plans, which can extend recovery time and influence overall medical costs.
  • Repair cost obstacles—Another key culprit of increasing accident costs is elevated vehicle repair expenses. While a variety of modern vehicle features—including blind-spot cameras, backup alarms, GPS devices and telematics software—have largely benefited businesses and their drivers on the road, repairing this advanced technology comes with a hefty price tag. In fact, according to a recent report from AAA, vehicles equipped with driver assistance systems often cost twice as much to repair as those that aren’t. In addition, widespread supply chain issues caused by the ongoing COVID-19 pandemic have also contributed to surging vehicle repair expenses. With demand exceeding availability for various auto parts and other necessary materials, repair costs among damaged vehicles have skyrocketed. Further, replacing vehicles has also become a challenge due to the overall vehicle shortage. Data from AlixPartners shows that 7.7 million fewer vehicles were produced in 2021 due to supply chain complications. Industry experts predict that these shortages could stretch into 2022, therefore continuing to impact vehicle repair expenses.

Tips for Insurance Buyers

  • Examine your loss control practices relative to your fleet and drivers. Enhance your driver safety programs by implementing or modifying safe driving and distracted driving policies.
  • Design your driver training programs to fit your needs and the exposures facing your business. Regularly retrain drivers on safe driving techniques.
  • Establish adequate driving schedules to reduce driver fatigue. Educate employees on driver fatigue and encourage them to take a break if they start experiencing symptoms behind the wheel.
  • Assess the risks associated with offering delivery services and implement measures to minimize potential damages (e.g., driver training programs and safe delivery protocols).
  • Ensure you hire qualified drivers by using motor vehicle records (MVRs) to vet drivers’ experience and moving violations. Disqualify drivers with an unacceptable driving record. Review MVRs regularly to ensure that drivers maintain good driving records. Define the number and types of violations a driver can have before they lose their driving privileges.
  • Consider technology solutions, such as telematics, where appropriate to strengthen and supplement other loss control measures.
  • Implement a driver- or employee-retention program to maintain experienced drivers.
  • Prioritize organizational accident prevention initiatives and establish effective post-accident investigation protocols to prevent future collisions on the road.
  • Examine your Federal Motor Carrier Safety Administration BASIC scores to identify gaps in your fleet management programs, if applicable.
  • Determine whether you should make structural changes to your commercial auto policies by speaking with your Builtwell Insurance broker.