We are pleased to summarize key year-end 2021 financial results for U.S. commercial auto liability writers based on data available from S&P Global Market Intelligence software. Milliman’s cohort of commercial auto liability writers includes 40 companies or groups of companies, each with 2021 commercial auto liability direct written premium of more than $195 million. This selected cohort represents approximately 78% of the total commercial auto liability direct written premium volume for 2021. The metrics we reviewed show a significant increase in direct written premium after a slowdown in 2020, smaller one-year adverse reserve development in comparison to recent years, and a slight improvement in the 2021 calendar-year loss ratios.
Historically, commercial auto liability results have been problematic as indicated by the loss ratio deterioration within most accident years. This has been fueled by a continued marketing presence of the plaintiffs’ bar concerning bodily injury claims stemming from large trucking events and social inflation driving settlement decisions, among other factors. The industry has looked to remedy the situation by taking rate increases in recent years, but the overall increase in premium has not kept up with loss costs. The last couple years are showing some signs of improvement, but the influence of the COVID-19 pandemic on travel behavior along with rising transportation costs make it difficult to definitively determine whether the slight improvement in 2021 will continue into future years.
The following sections contain detailed information related to premium, loss ratios, reserve development, and surplus for the selected cohort.
Direct written premium (DWP) increases
Commercial auto liability has been experiencing sustained DWP growth in recent years, with the exception of 2020, which saw a more subdued increase. The smaller growth in 2020 is likely a function of reduced exposure, a reduced number of rate increases (replaced by some pandemic-related rate decreases), and premium refunds or policyholder dividends due to the pandemic. The impact of the pandemic refunds and dividends is difficult to measure given that their impact could be reflected in various accounting metrics, including premium reduction, underwriting expenses, and policyholder dividends. In 2021, the cohort’s DWP trend picked up right where it left off prior to the pandemic, growing by 21.3%. The significant DWP increase in 2021 is likely a function of several factors, including a return to pre-pandemic exposure levels, decrease in pandemic-related premium rebates or policyholder dividends, and the continuation of large rate increases. Nearly 75% of the companies in the cohort experienced double-digit increases in DWP, while only two companies experienced a reduction in DWP in 2021 compared to 2020. The graph in Figure 1 displays the total commercial auto liability DWP for the cohort, along with the percentage change from the prior year.
Figure 1: Top 40 commercial auto liability groups: direct written commercial auto liability premium ($ billions)
Loss ratio gap begins to narrow
The countrywide commercial auto liability calendar-year loss ratio (CYLR) continues to be worse than the CYLR for all lines of business, although that gap has started to shrink in each of the last two years. For this cohort of insurers, the largest gap in the CYLR for commercial auto liability compared to the CYLR for all lines of business was approximately 16% in 2019. However, that gap has shrunk to less than 6% in 2021. Commercial auto liability struggles in recent years have been well documented, as the line has been more heavily hit by social inflation driving jury verdicts higher and distracted driving as handheld technology advances, among other reasons. While these factors have more heavily impacted commercial auto in comparison to the property and casualty (P&C) industry at large, the gap between commercial auto liability and industry loss ratios is shrinking, which may be an indication that the rate action taken by insurers is beginning to impact the bottom line.
Figure 2: Top 40 commercial auto liability groups: calendar-year direct loss and DCCE ratio
The countrywide 2021 commercial auto liability CYLR for the industry was approximately 74%. The graph in Figure 3 shows the countrywide CYLRs as well as the CYLRs for several of the largest states for each of the last five years. The nearly two-percentage-point improvement in the countrywide CYLR was a function of decreasing CYLRs in approximately 70% of all states. In contrast to this widespread improvement, the most significant deterioration in CYLR occurred in Texas, which experienced an eight-percentage-point increase in CYLR in 2021 compared to 2020.
Figure 3: Commercial auto liability: calendar-year direct loss and DCCE ratio, total industry
The accident year results show primarily adverse development during the past five years. For example, the accident year 2017 loss ratio, which was initially reported at 78.0%, has deteriorated to 85.2% as of year-end 2021. However, the magnitude of the deterioration of the accident year loss ratios seems to have subsided during 2021. Additionally, the accident year 2020 loss ratio experienced a nearly two-percentage-point improvement during the last 12 months, something which has not yet happened for any of the three preceding accident years. The initial evaluation of the 2021 accident year loss ratio is approximately 73.4%, which is about two percentage points higher than the initial evaluation for the 2020 accident year. The higher initial estimate for 2021 could be a sign of additional conservatism booked by insurers in an effort to combat the continued uncertainty due to COVID-19, particularly because the CYLR in 2021 was lower than the CYLR in 2020, or it could reflect a return to pre-pandemic loss trends.
Figure 4: Top 40 commercial auto liability groups: calendar-year development by accident year, net ultimate loss and LAE ratio – commercial auto liability
Reserve development trends
The cohort’s one-year reserve development to net earned premium for all lines of business has been flat or slightly favorable for each of the last five years. Although the cohort’s one-year reserve development to net earned premium for commercial auto liability was still adverse in 2021, the 2.0% reserve development is the smallest amount of adverse development that the cohort has seen in any of the last five years, a welcome sign for insurers as they attempt to reverse the negative trends and stigma associated with this line of business.
Figure 5: Top 40 commercial auto liability groups: one-year reserve development
Policyholders’ Surplus (PHS) increases
PHS for the cohort increased 16.5% in 2021. The large increases in PHS during 2019 and 2021 are primarily driven by National Indemnity Company. Excluding National Indemnity Company, the 2019 increase in PHS was a more modest 9.8%, while the 2021 increase in PHS was 10.3%. Despite the significant impact that National Indemnity Company had on the change in PHS during 2021, there were several other companies in the cohort that also experienced significant increases in PHS. In fact, half of the companies in the cohort experienced double-digit increases to PHS, while only five companies in the cohort saw their PHS decrease during 2021. It should be noted that PHS is affected by many different factors, including underwriting results, investment income, distribution of exposures, etc. Many of the companies included in this cohort write multiple lines of business, therefore it should not be inferred that the total increase in PHS for the cohort is a direct result of commercial auto liability experience. The graph in Figure 6 displays the total PHS for the cohort, along with the percentage change from the prior year.
