Commercial Insurance Explained in 2023

-Wait till legislation lands on insurance companies, and the market will turn.

-Improved auto technology and infrastructure will reduce accidents and corresponding insurance rates.

-Increased availability of medical services and cheaper commercial cars will make insurance cheaper.

These have been sentiments on one side of the spectrum for quite some time. 

Commercial auto insurance policies have been steadily climbing for a couple of years. And sadly, the trend doesn’t seem to be slowing down.

Since consumers have been complaining, insurance providers must be having a ball, right? Indications show that they are possibly laughing all the way to the bank. After all, we haven’t seen many claims lately, right?

Interestingly, sentiments have been the same for commercial insurance providers. They are also complaining about current premium rates.

According to a report released by Fitch Ratings Inc, the commercial auto sector has been recording losses since 2010. 2016 was particularly poor, with the worst underwriting performance since 2001. Insurance companies could be doing better than we thought.

Commercial auto insurers see the highest premiums and lowest combined ratio since 2017. Source: S&P Global Market Intelligence

While we acknowledge that most providers have recorded losses, we can’t deny one simple fact. Commercial vehicles are progressively becoming safer.

That is the bottom line. Elemental improvements like lap belts, padded dashboards, and breakaway steering wheels paved the way for advanced safety features.

Modern trucks are now coming with auto-braking systems, stability control, head-protecting airbags, three-point harnesses, and anti-locking brakes. As a matter of fact, according to recent crash tests, one fleet was able to use collision-mitigation technology to reduce rear-end crashes by about 70%. Additionally, they established that the tech further minimized the severity of the remaining 30% of crashes.

2022 Safety Ratings of Selected Trucks. Source: GlobeNewswire

These commercial vehicles may still not be accident-proof, but crash tests have proven that they are indeed safer. And since insurance providers have always kept a close eye on such developments, consumers expect substantially lower pricing.

There is a disconnect. Commercial vehicles are now safer than ever before. But insurance pricing is still rising owing to increased losses by providers.

So, will this continue in 2023? Or will developing trends, coupled with evolving legislation, make commercial insurance cheaper?

Let’s look at the industry’s current position to demystify this issue. Then subsequently establish factors that will be affecting pricing in 2023.

The Commercial Insurance Industry Today

The 20th Century saw increased development of road networks and overall infrastructure in the U.S. The last quarter was fascinating, as it started a transportation trend that persisted for a few years.

Americans were making good money and buying vehicles, plus gas prices were relatively low.

Consequently, the number of miles traveled kept rising every year until 2008.

Then the great recession came with a wide range of consequences, among them reduced travel.

With funds not readily available in the economy, commercial trucks were not moving around as they previously did.

And this outlasted the recession until 2012, when mileage started rising again. The growth has been exponential since then, seemingly going strong for a while.

Travel Trends in the USA. Source: Verisk

In 2016 alone, Americans drove a total of 3.1 trillion miles thanks to gas prices decrease and an improved economy.

Commercial vehicles continue to contribute substantially to these figures.

Under normal circumstances, an average commercial driver moves around way more than his private counterpart.

Now review that from a provider’s perspective. First, more mileage translates to an increased risk of accidents and mechanical failure. Eventually, they offset this by periodically revising and increasing standard commercial premiums.

Speaking of auto accidents, it’s indeed true that manufacturers continue to produce safer commercial vehicles. But, look at the bottom line again – With mileage still rising, the number of accidents is expected to record a similar trend.

Additionally, even with current traffic legislation, Americans have never been known to be the most careful drivers.

True to this, accident frequency is currently at its highest in the U.S. In 2015 alone, there were 4,311 large truck and bus accidents across the country. Compared to previous years, that translates to a 26% increase since 2009.

Accident Frequency. Source Verisk

According to National Safety Council estimates released in 2020, 2020 was the deadliest in a decade, a 132% rise in the last 28 years.

Now let’s analyze that against miles traveled. In 2020, there were 35,766 fatal crashes. So an increase in mileage translates to a corresponding growth in accidents and deaths.

Administrative expenses, property damage, medical expenses, and losses in productivity and corresponding wages- the cost of auto accidents in 2020 was $473.2 Billion.

Of course, such a trend only goes down with insurance companies. And that’s one more reason why 2022 saw an increase in auto insurance premiums across the board. But despite that, commercial auto insurance providers have hit depths the industry hasn’t experienced in 28 years.

After a decade of losing money, the commercial auto insurance segment had a below 100% combined ratio in 2021 and is expected to have similar results in 2022 because of premium growth and better reserve development. However, the performance may not last after 2023 because prices will stay the same, and costs will go up.

Commercial Insurance Pricing Outlook in 2023

If you feel commercial insurance rates have been unfair in 2021 and 2022, there isn’t much good news for you in 2023. Insurance providers like to market themselves as “protectors” of liabilities. As a result, they always seem willing to sacrifice their resources for your benefit.

But they are all businesses, not charities. And the principle mantra for any business is profits.

So, unless commercial vehicles drastically reduce their travel distances and maniac drivers suddenly reform, expect to pay a little more for your commercial auto insurance over the next 12 months.

The rates throughout 2023 will be determined by the recent proportions of expense to revenue, commonly referred to as a “combined loss ratio.” Usually, it’s all good for a company until the ratio hits 100%.

At that stage, the insurance provider is breaking even. Anything above that, therefore, signifies losses. As a result, the company is losing more than it makes from the premiums paid.

Let’s look at current ratios across the top 10 auto insurance companies.

Top Insurance Companies Compressed Loss Ratios. Source: US Commercial Auto Insurance Recovery May Prove Unsustainable

Please note that these are supposed to be insurance businesses’ crème de la crème. It’s where you’d probably place your money if you thought about investing in auto insurance.

However, the growth of premiums slowed down in 2022 as profits reached the highest point in the current market cycle. In addition, since inflation increases, it costs more money to go to court, and people need clarification on the economy.

It makes you wonder where other smaller companies lie. That isn’t nice for auto insurance providers and consumers- including commercial clients.

Some people have argued that they should recover by only penalizing commercial drivers who’ve been in accidents in the past.

Unfortunately, it’s not that simple. The situation is so dire that your rates will still go up even if you’ve never been a mile away from an accident. However, that’s the only way to bring their ratio back below 100% progressively.

If the current situation were anything like how it was back in 2010, we’d be dealing with different projections. But, unfortunately, 2010 was the exact opposite.

Eight of the leading auto insurance companies were operating within comfortable profit margins.

Only two recorded combined loss ratios of over 100%, marking an average of 99.7%.

Recent Underwriting Profit Margins

Get ready for a shock to your wallet; car insurance rates are estimated to jump 8.4% in 2023, the most significant surge within the last six years and setting an annual average of $1,780 across America! With more drivers hitting the roads again, it is no surprise that insurers have had to adjust their prices accordingly.

Long-Term Commercial Insurance Outlook

It’s difficult to predict the future of commercial auto insurance accurately. Expert projections on patterns are still a bit sketchy.

The price of oil could continue falling as more people switch to commercial electronic vehicles. This is because the latter will be significantly cheaper to acquire and maintain.

Over time, that translates to more commercial drivers and higher chances of accidents. As we’ve seen, this could negatively affect retail insurance pricing. On the bright side, however, there is little doubt that adopting autonomous vehicles will gradually reduce the average premiums.

According to research by the Stevens Institute of Technology in collaboration with Accenture, almost 10% of U.S. registered vehicles will be fully autonomous by 2035.

The rest, of course, will mostly be semi-autonomous, with advanced safety features. For example, even the heaviest commercial vehicles will have short braking distances and crash-avoidance artificial intelligence.

Since as many as 95% of traffic accidents are attributed to human error, such trends could trigger a significant shift in the auto industry. The severity of accidents will also drop, and competition between insurance providers will peak as the number of specialized companies rise.

Ultimately, we may see a significant drop in commercial premiums as companies adjust them according to actual risks. This may start happening as soon as 2026. That’s when large numbers of autonomous cars will begin hitting the streets.

Conclusion

• Commercial auto insurance premiums have been rising since 2022, and they’re expected to continue increasing in the short term.
• Long-term projections are still sketchy, but autonomous vehicles may significantly drop premiums due to reduced risk of accidents attributed to human error.
• This could begin as soon as 2026, when large numbers of autonomous cars will hit the roads. 
• In the meantime, it is crucial for businesses to shop around for their commercial auto insurance needs so that they can find the best rates possible. 
• Businesses should also ensure they are aware of any discounts they may be eligible for and take advantage of them if available.