As standard markets pull back on the amount of primary coverage they are willing to provide on transportation accounts, companies operating in the commercial auto sector are being forced to purchase more insurance on an excess basis, often at a higher premium.
Because claims costs have been increasing in recent years, most first-layer excess carriers are seeking double-digit rate hikes and limiting the amount of capacity they are willing to offer on each individual risk, according to the 2021 U.S. Transportation Market Outlook.
“The severity trend has continued to go up, putting significant pressure on the excess auto carriers. Most of them are re-underwriting their portfolio to minimize their exposure in the lower layers,” said Andrey Miterin, Area Vice President, Transportation, at RPS.
“Most of the first-layer excess carriers are taking double-digit rate increases, limiting capacity and exposure on each individual risk,” he said. As a result, “where historically we would be able get $4 million excess of $1 million with one carrier to get to a typical $5 million, now we have to engage at least one other market to round out the placement. Most of the companies in the lead position would like to offer no more than $2 million in excess coverage.”
First-layer excess carriers are also seeking more involvement in claims handling since more and more settlements are piercing their layer.
“We typically place excess above a $1 million primary attachment point. The excess layer is almost becoming almost like a working layer. Claims adjusters and attorneys want to be involved in the bodily injury cases making sure that they’re managed properly. Most of the excess carriers are underwriting the risk as well as the primary carrier.”
A provision in the proposed INVEST in America highway funding bill to increase minimum liability limits for the trucking industry from $750,000 currently to $2 million is also likely to put pressure on excess carriers in the commercial auto segment, which has been struggling with profitability. Although losses fell during 2020 due to less road traffic during pandemic-related lockdowns, it was a short reprieve after decades of underwriting losses, which deepened to $4.0 billion in 2019, according to A.M. Best.
If the highway bill passes, insurance carriers will likely need to purchase treaty reinsurance on the additional limits they will be asked to offer if they don’t want to retain a large exposure on the same account, Miterin said. He also predicts that reinsurers will become more involved in underwriting transportation risks if minimum liability limits are raised.
“Currently there’s a lot of capacity out there, with cheap capital, low interest rates, especially after the 2020-2021 positive trend in industrywide loss results,” Miterin said. “But this could change quickly if the loss experience returns to past trends.”