American Agent and Broker, December 2003
Truckers Face a Tricky Road to Insurance
By BENJAMIN C. ARMISTEAD & WARD W. STEIN
Greenwich Transportation Underwriters, Inc., CMGA (GTU)
ARE we in a hard market for trucking insurance, and is there enough capacity? A prudent answer can be made only by evaluating each line and class of coverage and by understanding the many nuances of the current market.
Today, insurers and reinsurers continue to talk up a hard marketplace. This is understandable, as rate adequacy has not yet become evident in most transportation insurers' financial statements. With investor scrutiny high, insurers are challenged to pay for, and not forget, the sins of the past but also to make hay while the sun shines. This results in a push-pull struggle among the underwriting, product management, actuarial and marketing departments to come up with the "right" pricing methodology for sustainable profitability. Meanwhile, reinsurers rightfully are demanding to be part of the pricing discussion.
That doesn’t sound like an environment conducive to an easy flow of business and continuity of coverage—and it’s not. Today, a trucking company that is continually insured with the same carrier for three or more years is the exception, not the rule. Why? Declining returns have caused many truck-insurance writers to withdraw from the market. In 1999, there were nearly 80 insurers writing truck business. Today, you’ll find maybe two dozen. The flight of capital from trucking insurance has been extraordinary. We see this as a good thing, because many insurers who were not doing business professionally have succumbed to the loss of their reinsurance. Their capacity had been forcing the marketplace to price business unprofitably.
Insurers now have a mandate to increase rates—and renewal retention often takes a back seat to it. Faced with this situation, agents are marketing trucking accounts to most of the free world, which churns insurers’ books and ends otherwise good and valuable insurer-insured relationships.
Trucking claims in recent years have been more severe than anticipated. Reinsurers have reported an increasing number of claims larger than the typical $1 million policy limit. The $1 million excess of $1 million, and $2 million excess of $1 million, layers are now known as “working” layers, meaning that claims payments are to be expected in them, rather than as catastrophic layers, whose chances of being penetrated are remote. At the same time, catastrophe losses are more severe than they were 10 years ago.
Because of this severity, rate increases for excess/umbrella insurance---when available--have been in the 50% to 100%-plus range. Indeed, many excess/umbrella insurers now require $2 million in underlying commercial auto liability. At the same time, most reinsurance treaties for this underlying coverage limit per-risk capacity to $1 million CSL. Can you say Catch-22?
As a result, many truckers are forgoing excess or umbrella coverage unless a shipper or manufacturer requires it. Since loss severity will continue in the short term, absent meaningful tort reform, it is apparent that many truckers are underinsured for liability loss. One adverse judgment exceeding the primary limits could bankrupt a trucker.
While lack of reinsurance has driven many carriers from the transportation market, most of those that remain are doing much better financially. They are pretty much able to pick and chose who they want to write and have no problem meeting their annual production budgets. But because some insurers have supported unprofitable business for so long, new management and ownership is requiring a quick turnaround, which is not easy to accomplish. Hence a continued exodus of capital may continue.
Since so much business is being dumped on the street, some agents and truckers many hope there will be a few new takers. But they aren’t materializing--especially in regard to commercial auto liability insurance. We believe that insurers’ capital will continue to end up in other places in the near term—at least through the first half of 2004.
Despite the aforementioned problems, we’ve found more than 20 carriers still competing for commercial auto liability insurance. But the game has changed. They are only interested in accounts if they can get what they consider to be adequate pricing--which usually is a great deal higher than expiring. Consequently, agents should be educating their clients to expect higher rates and should be prepared to explain why they are justified. Too often, this news is conveyed to trucking clients only at the last minute, causing great turmoil in the sales process and making our industry look unprofessional.
For “vanilla” trucking businesses (those with good financials, acceptable claims experience, and sound and auditable safety and maintenance programs), there is more than enough commercial auto capacity at adequate pricing (adequate pricing being a relative term). The trend of sharply increasing prices for such business appears to be over. Even so, carriers are still pricing business on a per-power-unit basis rather than on a mileage-per-unit basis, which is the true exposure base.
What about nonstandard or substandard commercial auto liability business? Most certainly a hard market continues for such risks. Some insureds may go out of business for the lack of insurance availability, despite the fact that there is usually an assigned risk pool available in most states for such accounts. Where capacity is available, premiums are quite expensive.
Workers compensation for truckers is in even worse shape, and capacity is limited whether the risk is vanilla or not. As with commercial auto liability, there has been a flight of capital from workers compensation. Availability increasingly is being geared to radius-restricted business; the farther the trucker is away from the state of domicile, the tougher it is to find a voluntary market. General-lines agents have a better opportunity to write this business than transportation insurance specialists, as they may be able to get a standard carrier to write the business as an accommodation.
Since owner-operators in some states are not required to carry workers compensation insurance, occupational accident with contingent workers compensation once was seen as an alternative. While such coverage had been readily available prior to Sept. 11, 2001, now it too is drying up. Some agents mistakenly have tried to sell this coverage as a substitute for workers compensation, which it certainly is not.
Many workers compensation carriers insuring trucking companies are now demanding the payroll for all owner-operators or certificates of insurance showing that all of a trucking company’s owner-operators have workers compensation insurance. If no insurance is in place, carriers will pick up the owner-operator payroll at audit and charge the trucking company for it. This is causing a huge problem between truckers and their agents. Furthermore truckers involved in moving and storage and those using lumpers (independent contractors that unload trailers) are finding less capacity for workers compensation insurance.
All is not lost, however, when it comes to truckers insurance. Unlike the markets for primary commercial auto, excess/umbrella, and workers compensation lines of insurance, the market for physical damage insurance seems to be softening. Rates in the range of 3% to 4% per $100 of coverage are quoted regularly
In the past few years, physical damage insurance has been profitable for many carriers. Ample capacity is available in both the admitted and surplus-lines marketplaces. Irrespective of its financial capability and claims experience, a trucking risk usually can get a physical damage quote.
Underwriting profitability stems from coverage limitations and not necessarily from truckers taking greater care to protect themselves and their leinholders from loss. Insurers usually exclude loss of earnings, mechanical breakdown, betterment and “gap” coverage (the difference between replacement cost and actual cash value).
Admitted carriers that quote commercial auto liability are also demanding the trucker’s physical damage business. The rates they charge for it usually are higher than the market average, which helps these carriers hedge any commercial auto liability shortfall. Despite this factor, we see physical-damage rates continuing to soften overall.
With premiums hardening for many other lines of coverage, we cannot understand why more agents are not recommending physical damage coverage with higher deductibles or retentions. The knowledgeable agent realizes that truckers collectively are paying physical damage insurers not only for claims but also for associated loss adjustment expense and a profit percentage. Consequently, higher retentions make sense. Moreover, they can help offset price increase on the other lines of insurance.
The motor truck cargo (MTC) marketplace has softened somewhat. It is dominated by package carriers that write the commercial auto liability, physical damage and general liability insurance in conjunction with the motor truck cargo coverage. The coverage also is available from inland marine carriers, which generally offers better coverage forms. However, these carriers want MTC to make up a set percentage of their overall marine books of business. If they get too much MTC, they start writing less of it.
The main cargo underwriting parameters are financial viability, claims experience, types of commodities hauled and limits requested. Financial viability is of paramount concern to cargo underwriters, since insurers are responsible for all losses up to the filing limit of $5,000 per claim, including losses beneath the deductible (frequently called OS&D’s – overages, shortages, and damages). For risks that do not pass financial muster, capacity is limited indeed. The Central Analysis Bureau provides financial benchmarks for the trucking industry that most insurers regard as gospel relative to financial underwriting.
If a trucker passes financial muster, claims experience becomes the most important underwriting factor. The entire motor truck cargo industry is shying away from truckers with high claim frequency. As with physical damage insurance, agents would do well to encourage higher deductibles.
If the account passes both the financial and claims benchmarks, the commodity breakdown and limits profile become important. Certain commodities like liquor, tobacco, consumer electronics, and clothes, which have a high propensity for theft, can be hard to insure. Carriers shy away from auto haulers and truckers who haul heavy equipment, due to the limits profiles of such accounts. Telling an MTC underwriter that your insured is hauling computers—which offers the double whammy of a high theft exposure along with a high limits profile--is a great way to get the underwriter to hang up the phone.
Truckers have done little to convince cargo insurers that they can protect unattended vehicles and their cargos from theft. Consequently, more and more carriers are excluding this exposure via endorsement. Too often, agents may not be making truckers and their shippers aware of this development.
In the motor truck cargo marketplace there is ample capacity for “vanilla” risks. Increasingly, carriers will be unable to raise rates for such accounts or to renew as expiring. But for the “non-vanilla” risks—those with some of the characteristics we’ve just described--there continues to be little capacity available and no improvement expected in the near future.
In regard to the other coverages a trucker may need--general liability, property and non-trucking insurance—there is not much to report. We have seen little hardening in the marketplace, and ample capacity is available.
So what is an agent to do in this marketplace? The answer is to be smarter and more careful. Determine which insurance carriers are going to be in the business for the long haul and meet with them. Understand their risk appetite and be ready to place business with them immediately. They do not have time to be in the “quoting” business. Too often, we see agents placing coverage only with the low-dollar provider, which causes too much business to be placed with one carrier. We see most of the carriers in the marketplace enduring, but there is still too much volatility to assume that a carrier’s present risk appetite will remain unchanged.
As with all forms of insurance, being a successful trucking agent requires a win-win-win mentality (for your trucker, your carrier and your agency). Indeed, in this market we have a wonderful opportunity to make money for all concerned while protecting the trucker’s balance sheet. While most agents can do well when the market is soft, today’s harder insurance marketplace is the marketplace of the trucking insurance professional.
Benjamin C. Armistead is chairman and Ward W. Stein is president of Greenwich Transportation Underwriters (GTU), a managing general agency that specializes in truck insurance. They can be reached at 800-488-8852. Please visit their website at www.gtu-ins.com