How uniform is this Western experience?

Nearly half of the states have experienced loss deterioration. Colorado, California, New Mexico and Nevada feature prominently with an increase of more than 50% in their loss ratio.

Persistent losses in a large state like California, which writes the most commercial auto premiums in the West, have stark effects on the health of auto insurers who operate there.

Compare and contrast this with the Midwest, where 3 of the top states in terms of losses- Kansas, Ohio and Indiana, have still performed better than their Western counterparts.

Some portion of the contrast in the loss experience could be explained by the pace of regional economic growth. Among the four U.S. regions, the West recorded the highest economic growth as captured by real GDP growth from 2010, based on data from the U.S. Bureau of Economic Analysis.

Across the Western states, California’s and Colorado’s GDP grew at approximately twice the pace at the rest of the region, and this growth spurs commercial vehicle activity- more construction work, more deliveries of goods and people, in general, eventually leading to more accidents, and more losses.

The Midwest, on other hand, grew less than the national average- implying lower commercial vehicle activity. But there, it is not the most fast-paced ones that had the highest losses- an example of this is the economy of North Dakota, which grew at four times the rate of the Midwest but had a below-average loss experience for commercial auto. Thus, while the economy is strongly linked to commercial auto losses, especially loss frequency, other factors like the persistent and growing commercial driver shortage, landmark court judgments or higher medical costs are equally important in determining overall loss trends.

The road ahead

The industry’s reaction to the years of losses has been to increase rates, but commercial auto is still hurting.  Mere rate increases, generally applied using mostly traditional, and often too indiscriminate insurance methods, have not affected a turnaround for this line.

To be effective, and not create adverse selection, they need to be implemented with laser-sharp accuracy, in a timely manner so as to avoid playing catch-up all the time.

The conventional insurance approach has been unable to forecast losses adequately, leading to this continuing morass. To get out of this, the industry needs to scientifically assess and integrate into internal processes the relevant economic, legal, demographic and societal factors that drive losses.

Failure to do so, in a timely manner, will lead to further deterioration of commercial auto carriers’ top and bottom lines.

Dr. Renu Ann Joseph is an entrepreneur who has co-founded Luminant Analytics, which offers targeted analytics for insurers. An economist from the University of Illinois at Chicago, she has work experience in the financial services industry and in public health. She is passionate about using data insights to unravel the big picture. Connect to her on LinkedIn or reach out to her at [email protected]

This is the second in a three series article providing an overview of key developments in the US auto insurance industry and US roads in the past decade.

See also: America’s roads are a drag on U.S. auto insurers, consumers