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How Economic and Social Inflation Are Plaguing Commercial Auto Insurance

A recession, coupled with the numerous other challenges facing the commercial auto insurance market, will certainly create additional headaches for the commercial auto industry.
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how economic and social inflation are plaguing commercial auto insurance

After more than 10 years of unprofitability, the commercial auto insurance market is continuing down a bumpy road as the market outlook remains challenging. While the industry may have gotten a reprieve during 2021, posting a combined ratio below 100 for the first time in more than a decade, the first half of 2022 points to a return of difficulties, according to an AM Best report. 

However, there are reasons for agents to be optimistic. “The demand for transportation services remains strong because a lot of freight is still moving across the country, but at the same time there are several headwinds that persist," says Mark Gallagher, vice president, national transportation practice leader, Risk Placement Services (RPS).

While the National Bureau of Economic Research has not officially declared the country to be in recession, Jamie Dimon, CEO of JP Morgan Chase, warned in October that a recession could hit the U.S. within the next six to nine months. A recession, coupled with the numerous other challenges facing the commercial auto insurance market, will certainly create additional headaches.

“A drop in consumer demand will negatively impact the trucking industry because it will likely result in a drop in freight tonnage, and that will put downward pressure on freight rates," says Peter Matthews, senior vice president, commercial truck, IAT Insurance. Another challenge facing the industry includes “inflation, which has already put pressure on operating costs for trucking companies with fuel being one of the largest costs," Matthews says. 

Meanwhile, the war in Ukraine continues to exacerbate rising fuel prices and “persistent inflationary pressures mean that clients and insurance carriers are also dealing with the high cost of equipment, as well as the high cost of repairs," Gallagher says.

Additionally, lingering supply chain issues brought about by the coronavirus pandemic means “shortages have led to a significant increase in the cost of replacement parts and, to an even larger degree, the costs of used trucks as new trucks became scarce," says Nick Saeger, assistant vice president of transportation products & pricing, Sentry Insurance.

Meanwhile, an ongoing challenge that predates the pandemic is the driver shortage. “The current driver shortage is estimated to be approximately 80,000 drivers, and that has led to several issues when it comes to underwriting the driver pool, including an aging driver population, young inexperienced drivers and high driver turnover," Matthews says.

In recent years, social inflation and nuclear verdicts have also become a growing concern within the commercial auto market. In one example last year, a Florida court ordered two trucking companies—AJD Business Services Inc. and Kahkashan Carrier Inc.—to pay a victim $1 billion after a 2017 crash on a stretch of Interstate 95 in northeast Florida.

“The drivers of social inflation—attorney involvement and their evolving tactics, litigation financing, and societal feelings toward large awards—are all still present and driving an increase in the number and magnitude of nuclear verdicts," Saeger says. “Any slowdown that might have been felt during pandemic-related shutdowns was likely both artificial and temporary."

Despite these headwinds, Gallagher is upbeat about the opportunities for many transportation operators and insurance providers moving forward, particularly in segments that can adapt to changing economic conditions.

“Trucking and transportation have always been the lifeblood of America's economy, and we still foresee opportunity continuing into 2023," Gallagher notes in the “2022 U.S. Transportation Market Outlook" from RPS. “Those insurance providers that are positioned best through market access and speed of product delivery will find growth opportunities in any market cycle in meeting the needs of a wide array of transportation clients."

Commercial auto continues to be one of the most challenging lines of business for insurers with “nuclear verdicts and unfavorable tort environments, combined with rising inflation, continuing to put pressure on insurance carriers to continue to increase rates to improve profitability," Matthews says. “However, the best risks will always have more options and will be able to secure the best rates." 

Echoing this sentiment, Gallagher says, “Clients that have poor safety scores or a poor loss history are going to certainly face higher rates than those that have good safety history and good loss results."

Olivia Overman is IA content editor.

Monday, January 9, 2023
Big I Markets