Danger in commercial motor

If the red signals weren’t already flashing up over commercial motor, they surely must be now across the industry, following Aviva’s revelation yesterday about its problems in the sector.
 
Aviva revealed that its commercial motor book deteriorated a whopping 15 combined operating ratio (COR) percentage points to 113%.

It was so problematic that Aviva had to pump £37m into reserves as van, taxi and scheme accounts bled its book.

RSA improved its commercial motor to 104% from 109.7%.

Did Aviva take its eye off the ball?

Aviva says that commercial motor was its fastest growing commercial line, going up from £545m net written premium to £618m.

The insurer was hit by prior years problems, so certainly you have to question its reserving strategy.

Perhaps the 13% rate hikes in 2011 was an attempt to ameliorate the prior years.  

More broadly, 2012 is likely to be a year of correction for the wider industry, and that means two things.

Firstly, rival insurers are likely, if they haven’t already, to follow Aviva’s example in pulling out of unprofitable parts of the book.

Aviva blamed van, taxi and scheme for its woes, and you’d imagine there’s some serious Aviva capacity withdrawal going on in those classes right now.

Secondly, there’ll be double-digit rate increases. Aviva piled on 13% last year and RSA put in 7%.

Such rate increases will continue across the market in 2012 as insurers battle claims inflation and frequency, which will put five or six points on COR.

So, when will the commercial motor market return to underwriting profitability? It’s probably going to take those large rate increases this year continuing into next year.

Commercial motor COR was 109.1% in 2010 (see below - source KPMG).

The market average is yet to be calculated for 2011, but it’s still likely to be deep in the 100-plus COR territory if you look at Aviva and RSA’s annual results.   

With investment returns still poor, only the very good and the kamikaze will eschew rate increases and capacity draining on parts of their book.

What is taking place is effectively a less extreme version of what happened in the personal lines market, although it’s not so bad in commercial that players will drop out altogether.

They say lightning never strikes in the same place twice, but somebody didn’t tell motor insurers that one.