In it for the Long Haul

Insurers need to think carefully about their approach to writing trucking business if they want to stay in the market for the long term.

Insuring the long-haul transportation segment has seen many twists and turns in the road over the past few years. The challenges markets are facing now — such as escalating legal expenses resulting from catastrophic highway accidents, and the increasingly competitive nature of this specialty line of business — mean trucking insurance, as a chosen target area for growth, must be approached thoughtfully and carefully.

TRUCKING IS DIFFERENT: THE CROSS-BORDER FACTOR

To put it plainly, trucking is different than other property and casualty insurance lines. It’s not a frequency-driven line with a large number of smaller payouts and shorter settlement periods. It is in fact severity-driven by nature. This is due to the type and size of vehicles covered and the third-party liability limits that trucking companies are legally required to maintain. There may not be a lot of incidents, but when they happen they can be traumatic, destructive and expensive.

Due to the consequences of heavy commercial vehicle accidents, a higher duty of care is placed on overland carriers, especially when driving in the United States. As soon as a vehicle crosses the border, there is a legal requirement for higher liability limits; truckers must contend with different compliance rules and legal environments in each state. Therefore, it is in an insurer’s best interest from a profitability point of view to thoroughly understand and have mechanisms in place to deal with the negative impact of travelling in such areas. Some states are highly litigious and are more costly due to the large awards that can be handed down in U.S. courts.

Experienced transportation insurers are aware of and account for those areas by creating zone rating that evaluates routes down to the last digit of the zip code. Not only does the state in which the accident happens matter, but, in some states, the final settlement outcome will vary by county.

The higher litigation expense of managing an American court case from Canadian soil and balancing back reserve and payment structures with a currency exchange are just the beginning of the complexities in today’s cross-border, long-haul trucking sector. Fluctuating currency exchanges between the United States and Canada can also create unique loss-reserving impacts to claims adjusting expenses.

THE IMPACT OF TODAY’S ECONOMIC ENVIRONMENT

Today’s economy has been hard on all businesses, and the Canadian insurance sector is no exception. Historically, there has been an almost inverse correlation between GDP and insurance profits. However, this recession has been different. Both the economy and insurance companies’ balance sheets are experiencing downturns at the same time, which is unprecedented. Additionally, 2007 and 2008 saw the beginning of hyper price competition to grab market share in core industries — e.g. manufacturing, construction, real estate — that make up major components of most commercial insurers’ portfolios.

Once again, trucking has become an appetite area for companies that traditionally stayed away from such higher-risk business. And again, as one would expect, the surge of reduced premium pricing throughout the industry–followed quickly by the economic credit crunch — resulted in severely diminished returns throughout the industry.

THE PRICE OF BEING UNPREPARED

What happens when a major insurer of trucking business suddenly leaves the market place? Brokers and customers need to take their focus off their business to negotiate new insurance with fewer companies from which to choose. Cost consistency leaves the marketplace, and prices could rise exponentially. In short, it creates an environment of uncertainty and additional anxiety.

We’ve seen competition jump in and out of this area over the past decade. New players seeing this area as a potential money-maker (e. g. by undercutting the competition) might not be giving adequate consideration to the inevitable $10-million loss. If that high-dollar loss happens in the early years, before the new player has adequately reserved enough funds for loss cost development — or even worse, if there are two such accidents in quick succession — the new entrant may find it cannot manage the necessary margin of return to validate the argument to stay in over the long term. This also assumes the new player has properly resourced its infrastructure with experienced claims management services. This is to prepare adequately for and mitigate the costs of the annual claims count that will occur when multiple fleets of 100-plus tractor-trailers are travelling the interstate highways of the United States with a limit of between $2 million and $10 million on each truck.

Let’s consider what transportation insurance might look like in a perfect world. The $10-million accident wouldn’t happen because there would be a satellite feed on every truck to monitor all aspects of driving and would bring the truck to a stop two miles before any accident. In that world, human responses would be completely consistent and foreseeable. The reactions of the driver, those around him, and other drivers on the road in every situation would be 100% predictable.

The reality is that we don’t live in a perfect world. Insurance companies thinking they can price everything right and can make money without putting in the legwork may soon find there is no successful quick win. There is no ‘Get-in, make-your-margin, get-out’ strategy. That $10-million accident is out there waiting to happen. Inexperienced insurers planning for luck, getting in too quickly to move their top line numbers, hurt both the trucking and insurance industries.

What truckers haul, where they go or how fast they drive is all relatively straightforward to predict. Less predictable are the split-second decisions of the person behind the wheel, the driver’s responses and the responses of other drivers on the road. Even if a trucking company has the most experienced drivers, adequately maintained equipment and perfectly secured property loads, another vehicle could still pull out in front of their truck, resulting in a devastating accident. The impact on the lives of those involved through physical injury, emotional distress and financial loss, either independently or as combined factors, will be determined not by a team of actuaries but by a jury of their peers in a local jurisdiction. It is only through continual, deep-rooted in- volvement in this particular type of specialty coverage that the extent of the harm done can be consistently predicted — even then, there are surprises. Companies thinking they can do it better, price it right and transact policies faster will likely find, as is usually the case in life, things are more complicated than they first appear.

INVESTMENT OF TIME AND RESOURCES

Trucking insurance specialists need to invest in developing in-depth pricing models to generate their insurance rates. They need extensive, industry-specific loss control expertise and talented underwriters who understand the subtle differentiators between a good-looking risk (at the premium level) and a safety-conscious, well-managed risk. They require strong infrastructures including advanced actuarial formulae, deep on-site risk assessment and ongoing consultation. Without an experienced network of claims management and claims legal file management resources in the United States, less prepared players will end up paying more per claim than others.

Even with focused, long-term investment in detailed risk modelling, underwriting analysis and actuarial services, devastating accidents happen. Ten-million- dollar awards happen on this line; at times, they cannot be avoided. But companies working with truck accident data spanning 15, 20 or 60 years have planned for them.

It’s a long road ahead for insurer
s that are serious about the transportation segment. Winners will understand the importance of generating positive results, while at the same time respecting and appreciating the unbelievable pressures trucking customers face in these challenging times. The best insurers will work together with those customers to make sure we’re all in it for the long haul.

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Due to the consequences of heavy commercial vehicle accidents, a higher duty of care is placed on overland carriers, especially when driving in the United States.

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Once again, trucking has become an appetite area for companies that traditionally stayed away from such higher-risk business. And again, the surge of reduced premium pricing might not be giving adequate consideration to the inevitable $10-million loss.