By Chris Steer, Chris Steer Insurance Brokers Ltd.
It’s a useful thing to know when something potentially unpleasant is coming in your direction – you can prepare for it. Forewarned, as they say, is forearmed.
The insurance industry is undergoing what may turn out to be a radical change in the way it does business and its of the kind that can lead to coverage getting harder to get and the cost thereof being much more than we have been accustomed to for quite a number of years now.
Understanding the driving forces helps so let me tell you a little bit about the way the insurance industry works – at least enough to explain some of the changes you are likely to see and then I’ll advise you on some things that you can do to prepare for them and minimize their impact on your bottom line.
In 2001, we came to the end of the longest period of soft market that I can ever recall in the Canadian insurance business and permit me to add that I’ve been in it for over forty years now and, no, the grey hair is not premature.
A soft market is one in which there is a lot of competition between insurers and so coverage is very easy to get, you have a lot of choice of insurance companies to deal with and so prices are kept low. Pretty well anybody in the transportation and storage business has, for the past fifteen years, seen no problem in obtaining insurance and generally there weren’t any shocks at renewal for a reasonably well operated company with a more or less acceptable claims history.
That changed in 2001, will change more so in 2002 and 2003, and let me tell you why.
Insurance company earnings are basically derived from two sources. The first is the premium that you pay and the second is the investment income that the insurer derives from all the premiums it has on deposit.
For the past fifteen years, insurance companies have been able to cover underwriting losses (means the difference between premiums received and claims paid or in reserve) through the money they’ve made on those investments. As a rule of thumb – or at least as an illustration – an insurance company could afford to payout roughly $1.05 on claims and its own operating costs for every dollar it received in premium and still make an acceptable profit for its shareholders. The profit came from the investment portfolio.
Over 15 years of a very competitive insurance market, insurers combined loss and expense ratios reached the point where they were no longer being covered by investment income and that was not helped one bit when the stock market took a dive in late 1999/early 2000 which simultaneously, as governments tried to kick start the economy, resulted in a drastic decline in interest rates payable on Bonds, Bank Deposits, etc. The Return On Equity for the insurance industry in the Year 2000 here in Canada got down around 2% and no investor is going to live with that sort of return for very long.
When investment income goes down, insurance companies have only one place to go to boost their earnings and that is to you, the customer.
As all of this is making itself felt in the transportation and storage industry and indeed anywhere else that makes use of insurance, we’ve got the destruction of the World Trade Centre on September 11th last which was the greatest single disaster in the history of the insurance industry. To put it into context, previously the record insurance loss came from the results of Hurricane Andrew in 1993 which totaled $20 billion. The final tally for the World Trade Centre isn’t in yet but the estimates keep going up and the figure of $100 billion is being mentioned more often.
The international insurance and reinsurance community took a very major hit in this year. Some insurers went out of business back in 1993/94 because of Hurricane Andrew. Others are likely to go because of the World Trade Centre and others have to face the fact that they must build reserves against the possibility of another such disaster or risk being wiped out should one come along.
The unthinkable becomes much easier to contemplate when it has just happened. Things like the possibility of a major earthquake on the West Coast (and too many insurers couldn’t tell you what their dollar exposure to that might be) ceased being the stuff of fantasy and became something that has to be budgeted for.
How does all this affect the transportation and storage industry?
Well, for a start, there has been and continues to be an exodus of insurance companies from the writing of insurance on large long-haul trucks. That kind of unit represents an exposure to catastrophic claims – particularly if it operates into the U.S.A. – that many insurers just aren’t prepared to handle.
Most of the insurers who are bailing out now only got into the kind of account that you represent because they saw the big premiums over there and thought they would like some of that action. Reality is that they never prepared themselves to underwrite and to provide loss control services for big fleets and many of them have found out the hard way that it’s not a good idea to write insurance for people’s whose business you don’t really understand.
I would guess that in 1999 there were at least 25 insurers who felt comfortable writing fleets that included long-haul units. That number would tend to decrease as the number of long-haul units became a higher proportion of the total fleet and decrease still more if it was operating into the U.S.A. Typically a fleet with 10%-15% of its operation happening in the U.S.A. would be regarded as a domestic Canadian fleet and thus have access to most of the insurers that were writing fleets but much above that the number of approachable insurers would decline. By the time you got over 50% U.S. exposure, there might have been 8-10 insurers with which you could deal and these were generally the ones who had some specialization in such fleets and some understanding of what they were all about.
As we enter the Year 2002, many transportation and storage companies have had to find a new insurer during the past 12 months and especially for those whose claims history is less than perfect, the process has involved a very sharp increase in insurance costs.
During the competitive years, insurance brokers like ourselves could look at the claims history of an account and persuade an insurer to produce a premium that, over the preceding three years, would have produced a loss ratio (i.e. percentage of premium paid out in claims) of 60%. If there was a big one in the record that was skewing the experience, the insurance company could frequently be persuaded to set it to one side as a sort of one-of.
Not anymore. Insurers are now looking at fleet claims records and producing a premium that would have produced a 30% loss ratio and they are very much less likely to take out the big one because, for the kind of equipment that you operate, those things are part of the pattern as well.
All of the foregoing tells you why you are hearing horror stories about insurance premium increases. Accounts with an excellent claim record are seeing 25%-30% increases. Those whose record is not so happy may find themselves facing multiples of preceding years’ premiums. The position of insurers at this time is that if they can’t get the premium they want for a given account, then they don’t want the account. An insurance broker faced with having to give a client that sort of news goes looking for a better quotation and finds him/herself in a sharply contracted marketplace which offers no improvement in cost.
By now I probably have most of you thinking about the nearest tall building. Let’s leave the doom and gloom and go on to talk about how you can minimize the impact of all this on your own bottom line.
Quite obviously your best bet is to be among those for whom the 25%-30% increase, however unwelcome, is the worst that happens rather than among those who don’t do nearly as well. The difference comes down to your fleet claims record and you will find insurers enquiring very closely into that and typically requiring to see the details for at least the past three years and on the paper of the insurance company so that they know it’s real.
There are certain other things that insurance companies look for in fleets like yours. They come down to a system or systems that show that management takes accident prevention very seriously indeed and has systems in place towards that end. A number of Insurers didn’t concern themselves with such matters – they are the ones who have jumped ship.
Extremely important is that these systems have to be effective. Too often all of the systems are in place and procedures are being followed but they are something that happens in the office and not one of them is really a second’s use until you get it into the cab of the truck with the driver.
Your drivers have to know and be part of your safety procedures for them to be effective.
Here are the systems that insurance companies look for:
1. Driver Selection
First of all, you already know it’s a DOT requirement that you have a driver file in which all the driver’s records are kept – employment record, reference checks, medical checks, checks for drugs, etc.
You can make all this procedure very simple indeed by subscribing to the Professional Drivers Bureau in Calgary. Telephone – 888-999-5693; Fax – 888-999-5694; E-Mail firstname.lastname@example.org.
These people maintain a database which is fairly certain to include any driver who represents himself to you as having had some experience and provides you with all of the foregoing. Turnaround time is same day or next day latest and at $15.00 per driver, it certainly beats having somebody fairly senior in your own company doing all the same work.
Driver selection obviously includes having one of your senior drivers take the applicant out on the kind of rig that he/she is likely to be driving and make sure they know how to drive, manoeuvre and park the unit and, again, with emphasis on safety.
Results of the driver’s test goes into the Driver’s File.
Typically the test will be conducted by one of your most senior and trusted drivers.
2. Ongoing Training
A driver new to your company should be re-tested after three months just to make sure he wasn’t on his best behaviour the first time and has now developed or rediscovered some bad habits.
A schedule of random testing for drivers who have been with you for some time is also very much approved of by insurers.
Keep records of all such tests.
Having spotters on the road is also a good idea. Doesn’t mean you have to hire people for this job. Your executives, sales and office staff can be instructed to check any of your units that they see on the road and there is a form that I know is provided by the Ontario Trucking Association and probably comes from the Canadian Trucking Association for exactly this purpose.
A source of excellent training videos is J.J. Keller (jjkeller.com). They can provide you with seven-minute videos that cover such driving issues as bad weather, parking, passing, night driving, etc. I know of at least one insurance company that is sufficiently impressed with the effectiveness of these videos that it has a library of them for the use of its trucking clients.
The whole objective of all of the foregoing is to let your drivers know that management is committed to safe operation as a means of controlling both the insured and the uninsured costs of preventable accidents. There is absolutely no point in having all of these systems in place in your office if they’re not also getting into the cab of the truck with the driver. Your drivers need to know that they’re going to be re-tested, that their performance on the road may/will come under scrutiny and then, of course, there’s what happens in the event that the driver does, after all this, become involved in an accident.
3. Driver Discipline
You should have in place a review procedure for any accident that occurs.
Approaches to this vary company by company. In a larger organization, there might be a review committee consisting of a representative of management, one or two senior drivers, the driver training supervisor, if there is one, and maybe the person in charge of vehicle maintenance for the company if there’s any suggestion that the accident was caused by an equipment failure.
Smaller companies obviously will pare that committee size down to the scale of their own operation but it should be a procedure that’s taken seriously by all parties.
It seems best to start from the position that every accident is avoidable. If the accident is caused by bad weather conditions, then it’s a question of the judgement of the driver in continuing to drive in such conditions. The car that cuts you off and sends you into the guardrail – well, that happens to every professional driver and probably a couple of times a year but some have an accident as a result and others don’t. You could apply understanding to the driver’s situation but the real objective, if that driver is to remain with the company, is to ensure that a lesson is drawn from whatever has happened and that the accident isn’t just smoothed over as unavoidable.
Each accident review should be the subject of a report. Some Insurers have forms for this purpose that they will supply to you. The report usually ends with the action that has been recommended with respect to the driver.
These accident reviews go into the driver’s file where an insurance company auditing your procedures will be able to see, and approve of, them.
In that same driver file should be an annual check on the driver’s record of things like speeding tickets and other traffic violations which don’t necessarily produce an accident. You can go online to do this – it’s getting easier.
You should have a maintenance record file for each of your units and, needless to say, it should show that maintenance is a regular thing so that lack thereof won’t contribute to the deterioration of your equipment and, most important from an insurance company’s point of view, won’t produce an accident.
Van Lines to which you may belong typically have requirements that a total of two months’ down time for maintenance be allotted during the year and then of course you’ll get the DOT checks at weigh scales which will deal with defects that they may find in your equipment and are further recorded in your CVOR or equivalent record.
Maintenance itself is, of course, very important in keeping your Fleet in good health. It’s also useful to be able to prove to the insurance company that that level of maintenance is taking place in a systematic way and there’s a potential usefulness in court – particularly if that court is located in the U.S.A. – where the maintenance records of your vehicle may be subpoenaed by a plaintiff’s lawyer who has just put your name on a writ beside a very large number.
What I’m counselling you to do here is to prepare the best presentation you can for your next insurance renewal and, once you’ve got it in place, for the one after that and the one after that.
Bear in mind that having the systems that I’ve touched upon above in place won’t mean a thing to an insurance company unless its results are showing up in your accident records. I said a little earlier that too many trucking companies have systems just such as I’ve described above in place but they don’t get out of the office into the cabs of the trucks that your drivers are operating. It is absolutely essential that each driver be aware that there is a serious attitude within your company as regards safety of operation and that they are right at the sharp end of the process. Doesn’t mean you bully your drivers or harass them because by and large they aren’t the kind of people that will put up with that for too long. What you may very well find is that once the drivers cotton on to what it is you are trying to do – if it’s new to them – they’ll begin to compete with each other to be the best there is and that can only work to your advantage.
End of story.
To be honest, I’m not quite as pessimistic as most people in my business in the matter of how long this hard market will last but, hard or soft market, if you’re running a good safe Fleet operation, then that much less of management’s time is tied up with the problems that unnecessary accidents bring in their tail (not all of which are payable by insurance) and your bottom line is healthier than it might otherwise be. I think that’s worth a bit of effort.