What goes up must come down?

The liability insurance crisis had a good run, but its days may be numbered. Fuel prices have taken center stage as the crisis of the day, and many carriers are preoccupied with the revenue side of the ledger as they negotiate through how the new hours-of-service regulations and a rebounding freight market will impact their rates and charges.

But while liability insurance premiums may no longer be attracting headlines, they have hardly disappeared as a major challenge. A CCJ survey of more than 200 readers conducted last month found 59 percent reporting increases in premiums during their most recent policy renewal.

The good news is that a third of those reporting higher premiums suffered increases of 10 percent or less. Nearly three-quarters saw premiums rise 25 percent or less. And those numbers may make current market conditions look worse than they are because many carriers’ most recent policy renewal was several months ago. Market observers are seeing a mostly flat market for today’s policy renewals.

The trucking industry isn’t out of the woods yet, however. While insurance brokers may have had some success chiseling away at premium growth, no new insurance carriers have entered the market to spur competition. Worse, today’s lineup of insurance providers could shrink even smaller, threatening to make a softening market harder again. And it remains to be seen whether trucking operations will continue to exercise discipline on driver hiring standards and loss control as the freight rebound continues.

A market in transition
Insurance professionals suggest that the market for insurance premiums has stabilized, albeit at a high level. Conditions vary, however. “For smaller companies that buy low-deductible or guaranteed cost policies, premiums are basically flat to 5 percent lower,” says Alan Shetzer, executive vice president of the transportation unit at insurance brokerage firm Hilb Rogal & Hobbs. Insurance companies are giving trucking companies slight breaks in some cases if they agree to early renewals rather than going to market, Shetzer says. “For larger companies taking bigger deductibles, the market is basically flat.”

On the other hand, some trucking companies – based on a combination of factors, including loss history, financial strength and, perhaps, luck – are doing better. “The liability market has stabilized, and I have even heard of some sizable decreases,” says Jim Millar, transportation division leader for Wachovia Insurance Services.

“The hard market has certainly flattened out, and in some cases has started to soften,” says Terry Burnett, president of Burnett Insurance Corp. “There are a couple of situations I’m aware of where insurance companies have put in place rate increases in 2003 and are now going to rescind them.”

While there is mild softening here and there, trucking companies are realizing that the market is still hard when they start trying to get relief in certain areas. For example, deductibles are staying the same, Shetzer says. His clients’ most frequent request is to obtain lower deductibles, but when they see what that does to premiums, they are staying put.

On the other hand, perhaps lowering deductibles is not what carriers should be doing anyway. Bill Prester, president of Aon Truck Group, argues that now is the time for carriers to begin thinking about taking on more risk. To the extent motor carriers can capitalize on the shortfall of capacity by getting a better rate and improved productivity out of customers, they should leverage that financial strength in the insurance marketplace, Prester says. “With more money and stronger balance sheets, trucking companies will be able to afford to look at alternative insurance products.” The ability to take on more risk gives motor carriers more control over insurance costs.

Prester points out that during the peak of the insurance crisis, some carriers would have gladly taken higher deductibles but couldn’t because they lacked the financial strength to post the necessary collateral. They didn’t have cash, and no lenders would extend a letter of credit. So these carriers were locked into guaranteed costs programs. “They weren’t able to purchase deductible programs, so they had to pay substantial premiums,” Prester says.

Uncertain competition
Although a trucking company’s willingness to share risk is a major factor in insurance costs, lack of competition among insurance providers will still drive premiums higher than they were during the soft-market days of the late 1990s. Shetzer points out that there have been no new players in the trucking insurance market, and he doesn’t envision any for another year or so until insurance companies get healthier. Indeed, in the short run, fewer competitors could be more likely. “My biggest worry would be Lincoln General Insurance Co., which is a big player in this market,” Shetzer says.

Lincoln General has struggled financially and currently has an A-minus rating, Shetzer says. That’s noteworthy because many shippers demand that motor carriers obtain insurance from A-rated insurance companies. If Lincoln General were to slip to a B+ or lower, that could force many trucking companies to seek insurance elsewhere, effectively reducing competition and hardening premiums once again, Shetzer says. “It would put a huge crunch on the existing marketplace.” He adds that the threat may not be imminent, but it’s clearly a development to watch. Burnett is concerned too. Any further insurance companies exiting the trucking market will keep the market hard, he says.

Prester draws a distinction between competition, which naturally drives down pricing, and an increase in the number of insurance companies willing to offer quotes. He has seen a few more companies willing to offer proposals to trucking companies – but only at the premiums motor carriers have been paying for the past few years. “In other words, they are coming in to take advantage of the marketplace while it exists,” Prester says. “They saw the opportunity to write the business at a price that was at the highest level in the last 12 years. I’m not saying they won’t stick around, but it is to be determined.”

Although prospects for significant new competition among insurance providers appear dim in the short run, the situation among insurance brokers is a little different. “Since the first of the year, there seems to be a great deal more competition among insurance brokers,” Burnett says. “Some of the brokers and agents are pushing the limits in order to get a cheaper quote.”

What’s driving broker competition? “The rate increases have flattened and brokers are looking to increase revenue,” Burnett says. “The only way to do it is to write new business.”
Burnett is starting to see some lower quotes in the field than what insurance companies say they are willing to write coverage at. But it’s not happening enough yet to get other insurance carriers worried about losing market share and counter with lower rates of their own.

So the current dynamic will help the trucking industry only so much. “There is no new player,” Burnett says. “For the market to soften, somebody has to come in with a significant appetite to write truck insurance.”

Without that competition, any dim prospects for further softening rest squarely with the economy and especially the securities markets, where insurance companies invest premium dollars. “I don’t think that insurance carriers will start cutting prices unless the stock market starts going nuts,” says Wachovia Insurance Service’s Millar.

Prester agrees. “Insurance carriers will have to be driven by a high return on investment and a booming economy. They are still focusing on underwriting profit.”

Controlling losses
During the worst of the insurance crisis, everyone paid significantly more for insurance, although motor carriers with poor loss histories were hurt first and most. But in today’s more stable market, trucking companies should see premiums and terms that more closely reflect safety performance.

In this respect, there is some theoretical concern over how the renewed driver shortage might affect motor carrier’s insurance policies, but few are assuming that higher turnover will automatically translate into higher premiums. “At the end of the day the most important factor is the loss history,” Shetzer says.

“Accounts with really good loss experience are probably experiencing single-digit increases this year,” says Millar. “Those with losses are going to have to consider taking the retention higher.”

Because loss ultimately is everything, claims handling is crucial, Millar says. “Even if you are not taking a deductible, you want to know how the insurance carrier is going to handle claims because it stays with you for 5 years.” In general, you want to know the company’s process for handling claims, the situations in which they will provide on-site adjusting, their approach toward litigation and the personnel who would be involved at various levels of claim severity. Also, ask how much access to information on claims status you will have, Millar suggests. “You can manage good information, and you can manage bad information. But you can’t manage no information.”

As of now, the freight rebound hasn’t translated into a noticeable increase in losses, and most observers are confident – or at least hopeful – that it won’t. Prester says his client base has taken the right approach by gaining control of their exposure by getting rid of bad drivers, slowing down their trucks and implementing more safety management techniques. He is confident that carriers are smart enough to control top-line growth. “A typical comment I get is, ‘I could use another 250 trucks, but I’m only going to take on 100.'”

Millar agrees. “Most motor carriers aren’t adding a lot of equipment. They have learned their lesson.”

Whether or not that restraint holds, the future of insurance clearly looks better than the recent past. “I think that the outlook of the insurance marketplace will be consistent with the outlook for the trucking industry as a whole,” says Prester. “Good times are ahead.”