Weak 2008 Economy Lightens Wallets in Commercial Auto Industry

A weak economy and a continued soft market cycle are among the most prevalent contributing factors to a 9.2% drop in direct premiums written in 2008 among the top 25 writers of commercial automobile insurance in the United States.

According to a statistical study by A.M. Best Co., just three insurance companies within the top 25 writers experienced positive movement in direct premiums written -- Great American Property & Casualty Group, with a 2.4% increase; Tokio Marine U.S. Group, with a 6.8% rise; and Farmers Insurance Group, with a 7.7% jump.

Those with increases in direct premiums written were the exception and not the rule in 2008, according to the study. The top 50 writers saw an 8.4% decrease and the total industry experienced a 7.6% drop.

Insurers and industry experts agree the the economy has likely had the biggest impact on the commercial auto insurance sector.

"The weak economy has caused fewer vehicles to be on the road due to less work, an increased number of bankruptcies and fewer new start-ups," said Mike Miller, regional marketing director for Progressive. The insurer, third among writers of commercial auto, saw an 8% drop in premiums. "Businesses have adjusted their coverages and insurance needs by increasing deductibles or taking vehicles out of service, which results in lower premiums and units on the road."

The same trend was observed by subsidiaries of the Travelers Group, said spokesman Jeffrey Weir. The impact individual companies may have felt was likely influenced by the industry. For instance, because the economy has affected construction, vehicles in this industry were more likely to be among those taken off the road. Travelers is the largest writer in the sector, followed by Liberty Mutual Insurance Cos., Progressive, Zurich Financial Services NA Group and American International Group. Each saw a fall in premiums in 2008.

"Companies are reducing the size of their fleets," said Loretta Worters, vice president of communication for the Insurance Information Institute. "As a result, there is less activity on the roads, less accidents and lower claims costs. High gas prices last year led to less use of cars, too." Better safety standards and improved technology for commercial vehicles can also play a role, she said.

The industry remains in a soft market cycle. The drop in frequency "allows companies to lower rates," said Miller. "Over the last couple of years, companies have significantly reduced rates.

"Also there has been a lot of competition from new entrants, as well as companies entering new markets or loosening underwriting guidelines," Miller added.

Driving down the overall drop in direct premiums written among the top 25 writers was Kingsway American Group, which experienced a decrease of 47.2%. In June, the Pennsylvania Insurance Department approved a run-off plan submitted by Lincoln General Insurance Co., a subsidiary of Kingsway Financial Services Inc. (BestWire, June 1, 2009). Lincoln underwrites primarily commercial auto liability and physical damage coverages for independent owner-operators, long-haul trucking fleets, buses and other commercial vehicles. A.M. Best Co. downgraded the financial strength rating to D (Poor) from B- (Fair) of Lincoln (BestWire, Sept. 8, 2009). Kingsway was within the top 12 writers in 2007 and dropped to 21 in 2008.