Commercial auto liability financial results

We are pleased to summarize key year-end 2022 financial results for U.S. commercial auto liability writers based on data available from S&P Global Market Intelligence software. Milliman’s composite of commercial auto liability writers includes 40 companies or groups of companies, each with 2022 commercial auto liability direct written premium of more than $230 million. This selected composite represents nearly 80% of the total commercial auto liability direct written premium volume for 2022. The metrics we reviewed show persistent top-line revenue growth in direct written premium, continued adverse one-year reserve development, and the return to pre-pandemic calendar year loss and defense and cost containment expense (DCCE) ratios.

Historically, commercial auto liability results have been problematic, as indicated by the loss ratio deterioration within most accident years. This has been fueled in recent years by a continued marketing presence of the plaintiffs’ bar concerning bodily injury claims stemming from large trucking events, social inflation driving settlement decisions, and supply chain issues, among other factors. In 2022, these issues were exacerbated by the highest inflation levels observed since the 1980s. 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. After a brief reprieve in 2020 and 2021, primarily due to pandemic-related frequency decreases, the commercial auto industry reverted to many of the worrying trends observed prior to 2020.

The following pages contain detailed information related to premium, loss ratios, reserve development, and surplus for the selected composite. It should also be noted that the historical data for this composite of insurers has been aggregated to reflect any acquisitions during 2022, such that the historical data is on a similar basis as current data.

Direct written premium (DWP) continues to grow

Commercial auto liability has been experiencing sustained DWP growth in recent years. After the nearly 20% DWP increase experienced by this composite in 2021, 2022 was another strong year from a growth perspective, as the DWP for this composite grew by 11.7%. While many companies continued to increase rates during 2022, rate increases did slow down somewhat compared to 2021. Just under half of the companies in this composite experienced a double-digit increase in DWP during 2022, compared to nearly 70% of the companies in this composite experiencing a double-digit increase in 2021. With the high inflation levels continuing into 2023, it is likely that DWP will continue to grow as insurers attempt to combat rising loss costs. Figure 1 displays the total commercial auto liability DWP for this composite, along with the percentage change from the prior year.

Loss ratios return to pre-pandemic levels

Commercial auto liability struggles in recent years have been well documented, as the segment has been hit heavily by social inflation driving jury verdicts higher, distracted driving as handheld technology advances, and driver shortages leading to more inexperienced operators on the road. As a result, the countrywide commercial auto liability calendar year loss and DCCE ratio (CYLR) continues to be worse than the CYLR for all lines of business. There was some evidence during 2020 and 2021 that perhaps commercial auto liability results were starting to turn a corner, but those outcomes appear to have been primarily driven by pandemic-related frequency declines for the commercial auto industry.

Figure 2 shows commercial auto liability CYLRs for each of the last five years on a countrywide basis and for several of the largest states. The countrywide 2022 CYLR for the commercial auto liability industry increased roughly 500 basis points to 79.0%, which is similar to the CYLRs for the industry in 2018 and 2019, prior to the pandemic. This can likely be attributed to rising loss costs due to inflation, both social and general. The increase in commercial auto liability CYLRs is widespread, as many states experienced an increase in 2022 and returned to CYLRs at or above pre-pandemic levels. Some of the larger states experiencing notable increases in 2022 CYLRs were California, Georgia, and New Jersey.

The accident year commercial auto liability results for this composite primarily show adverse development over the last five years. For example, the accident year 2018 net ultimate loss and loss adjustment expense (LAE) ratio, which was initially reported at 76.0%, has deteriorated to 85.2% as of year-end 2022. The accident year deterioration for the pandemic-influenced 2020 and 2021 years has been more favorable than the pre-pandemic years. However, it remains to be seen whether this development will continue to impact accident years 2022 and subsequent years in a similar way. The initial evaluation of accident year 2022 for this composite is 75.8%, which is roughly 150 basis points higher than the initial evaluation for the 2021 accident year, but similar to the initial estimates for the 2018 and 2019 accident years. The 2018, 2019, and 2021 accident years have all since developed adversely. Figure 3 displays the development of the net ultimate loss and LAE ratio for the last five accident years. Similar to the CYLR, it appears as though accident year 2022 has also returned to pre-pandemic levels (at least as of the initial evaluation), as the industry did not experience the same frequency-related benefits as it did in 2021.

Reserve development trends

This composite’s ratio of one-year reserve development to net earned premium for all lines of business has been slightly favorable for each of the last five years. However, the ratio of one-year reserve development to net earned premium for commercial auto liability continues to be adverse (see Figure 4). The 5.5% adverse reserve development in 2022 is more in line with pre-pandemic experience.

Policyholders’ surplus (PHS) decreases

PHS for this composite decreased by 6.7% in 2022, the first decrease to PHS in at least five years. The large increases in PHS during 2019 and 2021 are primarily driven by Berkshire Hathaway. Excluding Berkshire Hathaway, the 2019 increase in PHS for this composite was a more modest 9.4%, while the 2021 increase in PHS was 8.8%. The decrease in PHS during 2022 for this composite was not unique to the commercial auto liability industry and is representative of the experience of the broader insurance industry, which experienced an estimated 6.5% decrease in PHS in 2022. It is likely that the decrease in PHS was impacted by macroeconomic factors, such as rising inflation, that led to prominent levels of unrealized capital losses for the entire industry. Additionally, increased underwriting losses may have been caused by catastrophes such as Hurricane Ian, which resulted in more than $50 billion of insured losses across the entire insurance industry, according to Swiss Re.¹ PHS is also impacted by many other factors, such as investment income, distribution of exposures, etc. Many of the companies included in this composite write multiple lines of business, therefore it should not be inferred that the total decrease in PHS for this composite is a direct result of commercial auto liability experience. Figure 5 displays the total PHS for this composite, along with the percentage change from the prior year.

¹ Swiss Re (December 1, 2022). Hurricane Ian drives natural catastrophe year-to-date insured losses to USD 115 billion, Swiss Re Institute estimates. Retrieved May 31, 2023, from https://www.swissre.com/press-release/Hurricane-Ian-drives-natural-catastrophe-year-to-date-insured-losses-to-USD-115-billion-Swiss-Re-Institute-estimates/2ab3a681-6817-4862-8411-94f4b8385cee.