Commercial auto grew at the fastest rate of any major commercial insurance market segment over the last three years.
Yet, many insurers are greeting 2018 struggling with profitability. Their struggles are driven by both increased frequency and greater severity. The former is caused by distraction, speed, and an increase in miles driven. The latter, in turn, is driven by higher costs for replacement parts, and large settlements and verdicts for trucking-related accidents.
The result? Fleets are seeing rising premiums and shrinking markets — several carriers have stopped writing new business altogether. The industry-wide commercial auto combined ratio is running at 110 percent (a 15-year high!) And the industry has a seven-year streak of operating at an underwriting loss.
Fitch characterized the segment starkly as “... a profit drag for U.S. property/casualty insurers” in its July 2017 U.S. Commercial Auto Insurance Market Update.
Insurers can’t chase profitability with rate increases
As the insurance industry reacts to rising loss trends with significant premium increases, the result is putting increased pressure on the expense structure of many businesses. Hence, rising business insurance costs could prove problematic for businesses with a significant dependency on wheels. If the industry simply catches up with the current loss trends via premium increases only, underlying businesses risk being threatened. It’s important the industry also offers solutions to proactively control insurance costs.
Transforming “lost control” to “loss control”
While many commercial auto insurers may be in a tough spot, there is a way forward. The “cure” to the segment’s underwriting and claims woes isn’t just within reach, it’s been staring at the industry for years:
Telematics has been integrated into the personal lines consumer experience through a growing number of usage-based insurance programs. Some of these programs have been on the market for nearly a decade, and have built an impressive track record as a tool to improve acquisition, pricing, and losses.
Yet, telematics-enabled loss control programs haven’t caught on in the commercial segment. I believe this is due to three reasons.
Commercial auto insurers have been reluctant to adopt the learnings of successful personal auto usage-based insurance programs.
Telematics service providers generally don’t bring deep insurance expertise to the table, and thus haven’t figured how to incorporate loss control as part of their SaaS offerings.
Fleets may not have the bandwidth — expertise, budgets, scale, etc. — to build out an effective, telematics-based safety infrastructure. (Interestingly, though, most fleets do use telematics for route optimization, fuel management, vehicle maintenance, and tracking hours of service.)
Fact is, telematics can work in commercial auto insurance. Whether someone’s at the wheel of a Ford Transit or a tractor-trailer, there’s data to be collected. And that data can be used in a variety of ways — some unique to trucking — to help commercial lines insurers control loss costs while helping fleets trim insurance expenses and improve safety.
Putting telematics to work in commercial auto
Telematics provides the ability to capture driving behavior data for risk assessment, performance management, remediation, gamification, and elimination of distracted driving. Direct benefits span both insurers and fleets, addressing needs for improving underwriting accuracy and claims adjustment, as well as driver safety and performance.
Here are just a few of the ways telematics could be put to work in commercial auto.
Insurers:
Improve underwriting accuracy
Commercial underwriters ought to salivate over telematics. Location data, for instance, can help insurers flag and address radius issues (when a vehicle is driven outside of its insured radius). A Verisk analysis of commercial auto portfolios showed that insurers will have, over a four-year period, $6.4 billion in premium leakage on their books just from radius misclassification. Just as it did with mileage in personal auto, telematics makes radius a valid underwriting lever in commercial auto.
Leverage event data for accident investigations
Telematics makes a wealth of valuable data — perhaps game-changing data — available to claims investigators. Use of such data can bring greater clarity and accuracy to processes such as FNOL, insured/claimant interviews, accident reconstruction, and determination of fault.
Insurers can also use data as a training tool to sharpen the skills of both new and experienced investigators. Vast datasets — which insurers collect over time — can assist in understanding the broad factors that contribute to accident frequency and injuries.
Implement event-based pricing
Commercial underwriters have the flexibility to use scheduled credits and debits to improve pricing by incorporating safety scores, distraction measures, and driving behaviors. Self-selection — the notion that safer drivers are willing to be monitored — has proven to be a powerful segmentation tool for personal auto. It’s just as powerful with fleets.
Fleets:
Improve driver safety
Armed with mobile, OBD, vision, Blackbox, and other telematics tools, fleet managers can monitor driving behavior in real time, and develop scoring systems to provide objective feedback during daily or weekly reviews.
At deeper levels, telematics can help fleets build a “safety culture.” Drivers can and should be aware of what data are being collected, and see how that data (and the behaviors behind it) relate to accidents and downtime.
Provide objective data for personnel and other decision-making
Fleet managers can check telematics data exchanges (in addition to MVR) to better understand a potential new hire’s driving aptitudes, and as an evaluation tool during road tests. Managers can continue to use data during a post-hire probationary period in which the new driver must achieve minimum scores to remain employed.
Gamify driving behaviors
Gamification has proven an effective method to reinforce safe driving. Intrinsic rewards (leaderboards) and extrinsic rewards (cash bonuses) allow drivers to compete against one another and eliminate bad behaviors. Properly constructed, gamification keeps drivers motivated and focused on company goals.
The bottom line: Telematics gives insurers a powerful tool to adjust claims, improve underwriting accuracy, and cure their profitability woes. It’s proven to be worth between five and ten points in combined ratio. Telematics gives fleets objective data to improve driver safety and performance, reduce losses, and potentially cut insurance expenses. It’s not uncommon to see a 25% reduction in frequency. And it gives telematics service providers opportunities to grow in an “untapped” market segment through loss control consulting. The sometimes shaky SaaS models improve dramatically.
Designing and implementing specific customer solutions requires expertise not just in telematics, but in claims, product design and pricing, risk mitigation, underwriting, IT, strategy and safety. My company, Kairos Solutions, brings together backgrounds in all of these areas. Each team member brings decades of experience in his or her discipline, including senior-level leadership roles. Visit kairostelematics.com, or feel free to reach out to me directly, to learn more about how we help insurers, fleets, and TSPs grow revenue and increase profits.