US motor has received significant attention over the last couple of years as underwriting results have deteriorated in both the personal and commercial segment and the market has increased rates to catch up with rising claims costs. The surge in loss costs is due to higher frequency and severity.
Between 2014 and 2016 , after decades of decline, US traffic fatalities surged by 14%. People were driving more, especially with stronger employment growth and lower gas prices. There is also an uptick in speeding and drinking, but these factors alone don’t explain the surge in road deaths. Presumably the most important contributing factor is distracted driving from the substantial increase in smartphone use by U.S. drivers while driving. In a study of 3 million people, Zendrive, a San Francisco startup that analyzes smartphone data, found that drivers are using their mobile phone during 88% of trips. The negative impact gets compounded by behavioral changes in the use of phones on the road. Texting, Twitter, Facebook, and Instagram are replacing phone calls — all activities that require additional attention away from the road.
Loss frequency increased particularly for trucking accidents, which is related to a shortage of experience drivers. The return of economic growth following the recession created a demand for drivers that could only be satisfied by hiring drivers with lower experience and qualifications. Heavier trucks, higher road density, higher speeds, more distracted drivers etc contribute to the spike in loss severity. Truck accident victims are often injured much more severely compared to car accidents.
Increasingly since 2012 adverse loss development in commercial auto liability has contributed to the line’s elevated combined ratio. Commercial business was under-priced in the years immediately following the financial crisis. According to Conning, the estimated average claim size rose by 39% between 2006 and 2015, while commercial auto rates fell by 18%. Claims severity was also surging for personal auto lines over the past three years. Strong auto sales have replaced many older vehicles with newer ones that are more expensive to repair. The increasing complexity of the newer vehicles – including the proliferation of safety technology - is adding to the severity of car repairs.
Personal and commercial auto pricing has been increasing since 2015 and averaged around 7% in 2017 for personal (based on CPI) and around 6% for commercial auto (based on CIAB survey), with no sign of moderation. Profitability should be improving at this pace, but still has a long way to go to recapture lost ground.