Changing Regulation, Growth and Specialized Knowledge
The topics this month are connected by three important themes: Changing regulation, growth, and the need for agent's with specialized knowledge.
The transportation industry is required to meet the new Federal Motor Carrier Safety Regulations that will restrict drivers' hours. This single change alone will increase the current need for additional drivers. The industry is growing because of the improved economy. These two changes mean increased premiums for any agent who is willing to learn about the industry and the markets actively providing coverage for it.
Existing clients will have to be more aware of environmental exposures in the coming year. Environmental regulations are placing increasing burdens on business owners and a well-crafted environmental policy could protect them from significant fines and liabilities. Environmental coverages vary significantly and it is important for agents to find brokers with the expertise and an adequate number of qualified companies to provide the necessary coverage.
Driving Business Growth in Commercial Auto and Trucking
Regulations and economic factors are shaping the market
By Dave Willis
A number of issues—some economic and some regulatory—are affecting businesses and individuals in the commercial auto and trucking arena. Retail agents and brokers who understand these can help transportation clients address these challenges and bolster their business.
"Each year the American Transportation Research Institute (ATRI) surveys more than 4,000 trucking industry professionals to determine the top issues facing them," explains Lou Welch, vice president at Scottsdale Insurance Company. "This year, changes to the Federal Motor Carrier Safety Regulations' hours of service rules, which regulate a driver's work, driving, and rest hours, topped the list."
George Schreier, transportation underwriter at Creative Underwriters Corp., concurs. "Regulation has been a game changer closing in on 2014," he explains. "The new hours of service stipulations have created a less-than desirable working environment for the average trucker. Small to mid-size fleets don't have the leeway needed to abide by the rules and balance a decent home life."
He adds, "Without dedicated routes, they can't necessarily be certain that, when it's time for their 34-hour break, they will be home. This can mean choosing between livelihood and family structure. Pre-planning is essential to maintaining a high staff morale."
Doug Setters, president of Creative Underwriters Corp., says, "Hours of service rules will create more demand for additional drivers as our economy drifts upward."
Welch points out that the ATRI survey showed concerns over the Federal Motor Carrier Safety Administration's (FMCSA) Compliance, Safety, Accountability (CSA) program, which ranks carriers based on roadside safety violations. It was second on the list of challenges. "The shortage of qualified drivers ranked third," he adds.
Dave Firstenberg, president and CEO of Canal Insurance Company, has seen these issues play out, as well. "Continuing and accelerating driver shortages, coupled with the operational impact of the new hours of service regulations, are prime concerns," he explains. "Recent statistics show driver utilization at nearly 100%. There just aren't enough new drivers entering the industry to make up for those retiring or exiting. I don't see this trend reversing any time soon either.
"This could make it extremely difficult for motor carriers to stay within the regulations and economically move freight, and continue to retain only quality drivers," he adds.
Bill Kanehann, chief operating officer at NSM Insurance Group, says driving records and years of experience are affecting a number of firms. "They're having a lot of difficulty getting drivers that meet what had been their recruiting standard for owner operators," he explains. "That's getting very, very difficult. It impacts their average cost of onboarding. As underwriters, we have less and less desire to have those standards compromised because of the risk implications."
Stephen Mueller, managing director at OneBeacon Accident Group, points out the high costs of being in the business. "It's very expensive to run a truck," says Mueller, whose firm offers occupational accident coverage for owner-operators. "First of all, to buy one is like buying a house. Factor in all of the expenses and they may gross somewhere in the $160,000 area, but that could drop to below $50,000 after all of the expenses—for fuel, maintenance and more. They face huge economic pressures running a business, and, frankly, they really are small business owners."
He also points to a tough regulatory environment. "These guys have a lot of regulations to deal with—everything from safety rules to fuel efficiency standards," Mueller explains. "Economic and regulatory pressures are driving a lot of these owner-operators out of the business. At the same time, there's a lot of freight that has to be moved right now."
Paul Wilson, vice president of transportation at Southern Insurance Underwriters, says a major issue for trucking firms will be the rates shippers are willing to pay. "Indicators point to a lot of freight to be hauled, but shipping rates are very competitive, so truckers will operate on very thin profit margins," he explains.
Setters says new regulations affecting sleep apnea may place more driver hiring criteria pressure on trucking companies. "In addition, the Affordable Care Act will create more pressure for fleets to attract owner-operators," he notes. "Fleet management has become much more sophisticated. Some of this is due to regulations, but it's also just good business."
According to Dave McDermid, national transportation director at Risk Placement Services, "In 2014, as the economy continues to improve, we should see more trucks back on the road. With the previous downturn, costs of fuel and equipment really hindered owner-operators, as well as fleet owners."
Transportation insurance issues
McDermid adds, "As things pick up, and more trucks are rolling, the insurance market for them is getting more firm." Thom Bradshaw, underwriter and owner of TCB Insurance Programs, concurs. "We're seeing increasing prices—a general hardening of the market. With that comes tougher underwriting and more requirements for submissions.
"Over the past eight or ten years, things have been kind of lax," he adds. "That situation is changing. Underwriters are asking more questions and they're requiring more complete information. When the market is soft, business tends to stay where it is. In this environment, everybody is seeing a lot of business activity."
According to Mark Plousis, vice president of commercial auto at Philadelphia Insurance Companies, loss costs are up. "Costs to repair vehicles have gone up and costs of PIP claims have continued to rise, as have liability costs," he explains. "Fitch did a report last year that showed a significant increase in the costs of loss. Interestingly, the report said frequency was down but severity was way up."
Kanehann says usage issues have come into play for underwriters. "We cover firms based on their intended usage," he explains, "but sometimes we get surprised—often after a loss. For instance, a company that says it operates locally but has a claim 1,000 miles away is a problem."
"During this last recession, many trucking companies extended equipment replacement cycles and aren't yet back on track," notes Welch. "We are seeing more aging equipment, tractors and trailers, in use than we have in the past. Predictably, we are seeing more accidents related to equipment failure than ever before."
He also points to driver quality as a contributing factor. "As the economy improves, trucking companies need more drivers to meet shipper demands," he explains. "At the same time, drivers are being enticed to move to higher-paying industries, so trucking firms often are replacing good, experienced drivers with higher-risk drivers. These drivers have a greater likelihood of accident involvement, which will drive up an organization's insurance costs."
Bradshaw points out that when prices increase, the truck business tends to thin out. "Weaker motor carriers may not be able to afford the increased insurance prices," he explains. "That can lead to somewhat higher freight rates and a healthier overall industry. Higher underwriting standards can help improve overall safety, as well."
Firstenberg says, "Inspection results, which are now very public, affect the top and bottom lines of motor carriers, as well as those of insurance companies and shippers. The cost of a 'conditional' or 'unsatisfactory' DOT rating, for example, is becoming prohibitive to all parties in the motor carrier industry.
"Large losses account for a huge percentage of claim costs for truckers," he adds, "and as safety records continue to impact claim outcomes, this will only grow. This makes it increasingly important to reduce the frequency of claims through regulations, motor carrier standards and better driver experience."
CSA scores are driving change in the trucking insurance business. "A firm with poor scores and alerts will find limited markets available to offer coverage," Wilson explains. "The companies willing to offer coverage for these types of accounts are also very expensive. For clean accounts, we still predict an overall rate increase of approximately 10% because accounts have been priced too thin."
Schreier says, "The strict analysis of safety scores when underwriting a specific risk has increased exponentially within the last year. 'Good' to 'great' safety scores can make or break a decent rate for the insured. The ability to train and develop your staff's safety system knowledge is imperative to a successful operation."
Bradshaw acknowledges the increasing importance of safety scores but warns against putting too much weight on them—for now, at least. "I'm a firm believer that the data pool is too shallow at this point," he explains. "For the most part, the numbers haven't matured yet. It's a tool I use to assess risk, but it's just one of many."
"Many insurance companies are still in the process of evaluating the relationship between these scores and claim frequency and severity," Welch adds. "However, it is clear that high scores negatively impact an underwriter's opinion of an account."
Covering risks
Kanehann says the transportation business provides real opportunities for retail agents and brokers. "If I was a producer, I would be looking at commercial auto and trucking-related risks," he explains. "There has been some recent unprofitability, and prices are going up across the whole spectrum of commercial auto. This means customers and prospects are going to be open to entertaining quotes from someone other than their existing broker.
"In addition," Kanehann notes, "the dollar value of these accounts is going up. Many of the businesses are growing organically, so their revenue is up. Getting higher rates on growing businesses is certainly something worth exploring. Agents and brokers absolutely should have these kinds of accounts on their radar screen."
Plousis says retailers need to understand jurisdictional issues and how they affect customers and prospects. "Know your state and know your locale," he explains. "Understand the issues that are affecting your region. Are there uninsured motorist issues? Is it no-fault? Is it regulatory?
"A good agent or broker wants to know what's happening and have his or her ear to the rail in their individual state," Plousis adds. "If their insureds' vehicles are crossing into other states or if they have a multi-state fleet, they need to be aware of factors that affect vehicles in each state."
Firstenberg notes: "For most clients, standard auto liability coverage is quite adequate. It will be interesting, however, to see how the insurance industry reacts if Congress changes the basic required limits significantly. Severe losses are a huge part of the loss costs in the motor carrier business. Limit changes could make insurers that specialize in the motor carrier business even more dominant, because they are well equipped to get the best possible outcomes when claims occur."
Welch encourages agents and brokers to make sure clients and prospects understand coverages and coverage options. "For example," he says, "in many instances, towing costs may or may not be covered or they may be limited. Also, pollution coverage is often excluded in commercial auto policies, and that can be a major uninsured exposure for their clients. Cargo forms, in particular, vary greatly so it is important for an agent to fully understand what their client is carrying and whether it is covered."
He points out that it's not uncommon for truckers to develop relationships with new shippers, resulting in the trucker hauling different types of freight. "Keeping on top of the exposure value associated with changes in freight is critical," Welch adds.
McDermid says that if a retail agent or broker does not specialize in commercial auto or trucking, they need to find a resource that does. "An MGA that specializes in transportation generally holds several contracts with carriers writing commercial auto and truck, has underwriting and background tools, and has the expertise to
help the agent or broker work their way through this tough class of business," he notes.
Wilson stresses the value of longer-term relationships. "If an account has performed well and the current carrier offers reasonable terms with controlled increases, there are good reasons to not shop the account," he says. "To be viable, the insurance industry needs to be profitable. And good relationships are important for the overall health of the business."
According to Schreier, retail agents need to understand the FMCSA safety system inside and out. "They need to advise their insured on the importance of running a good, clean operation, and how this can provide them better rates in the long-run," he explains. "Education is key, especially with smaller to mid-size trucking management teams, who really need the agent's insight."
Agents and brokers can help clients boost efficiency, Mueller notes. "Independent operators are continually looking for ways to cut costs," he explains. "Everyone is trying to be efficient. If they had to buy workers comp, they would be less competitive. A good alternative insurance program that can help address their occupational accident exposures can help protect them while helping them stay competitive."
Rick Pettit, marketing manager at Mid Atlantic Insurance Services, also sees value in helping owner-operators maintain their financial health. "Although they're not required, as sole proprietors, to carry workers comp, they often are called on for certificates of insurance if they want to do business," he explains. "A ghost policy can serve that purpose at a reasonable cost.
"Coupled with an accident policy, the insured can get a certain amount of protection or reimbursement for covered medical expenses," Pettit adds. "The accident policy actually can provide coverage for things that occur on or off the clock."
Using such an approach can help agents serve not only owner operators, but firms that contract with them. "If an agent or broker works with a firm that hires independent contractors, they can suggest a ghost policy as a way to address the hiring firm's certificate requirement," Pettit adds. "It's a way to simplify the process and bring value to both parties."
Bradshaw offers universal advice that can help agents and brokers serve commercial auto and trucking clients of all sizes. "The first thing they need to do is put together a solid submission," he explains. "Don't waste your underwriter's time with an incomplete submission. Insist that your clients and potential clients dot every 'i' and cross every 't.'"
He also encourages strong agent involvement. "Agents and brokers should do a little bit of the work themselves," he notes. "Collate loss information into a spreadsheet and break it down so the underwriter has a quick reference guide. For example, if you can give the underwriter a three-year snapshot by line how the losses have been, that makes his or her job a lot easier.
"Your submission will go to the top of the pile if you have a reputation for delivering a good, quality submission with good summaries," Bradshaw adds. "If you have a reputation for sending information in piece-meal or just sending enough to try and block the market, your submissions will go off to the side. You can help yourself and your customers by putting together a complete submission that the underwriter can dive right into."
Environmental Exposures Call for Agent, Broker Response
New and emerging risks affect clients and their communities
By Dave Willis
A number of factors are leading to increased opportunities for retail agents and brokers in the environmental insurance arena. Those who understand the issues and exposures that clients and prospects face can help protect not only the businesses, but also the communities in which they operate.
Bill Pritchard, president of Beacon Hill Associates, points to a growing public awareness of the environmental impact on businesses. "The explosive growth in the energy sector and the concerns regarding potential environmental impact have brought pollution from the back burner to the forefront," he explains. "All types of commercial clients have to be aware of their exposures and have a corporate strategy for dealing with them."
He notes that such a strategy can incorporate risk avoidance, mitigation and transfer. "Agents and brokers need to be prepared to discuss these issues, both from the perspective of coverage [that] businesses do not currently have, as well as what they might buy elsewhere," Pritchard says.
According to William McElroy, senior vice president of environmental for Liberty International Underwriters, a major area of expected activity in the environmental arena for 2014 involves oil and gas development, particularly shale gas projects. "Energy development is a major engine of economic growth," he points out. "Public concern and technical uncertainty surrounding hydraulic fracturing of gas wells, for example, is likely to drive both regulatory and technical innovation in this field."
He expects to see new regulations at the state and local level that are intended to foster best industry practices. "These will allow energy development in nontraditional formations to go forward in the most environmentally sound way," he says.
Another area that McElroy expects will present challenges in the coming year involves mold and other potentially pathogenic organisms. "Both the frequency and severity of claims in this area are increasing," he observes. "This is especially important for real estate owners and construction trades to understand."
Finally, he notes, the issue of contractual transfer of liability will probably get much more attention in 2014. "There has been a period of laxity of contracting terms, which has forced otherwise innocent businesses to accept liability for damages that would properly be addressed elsewhere," McElroy explains. "We believe this tendency has not been properly evaluated by risk managers, nor have underwriters properly priced this risk into their rates."
Susan Doering, vice president of environmental underwriting at Philadelphia Insurance Companies, is seeing—and expects to continue seeing—more contamination resulting from weather-related factors.
Recently, for example, a tornado tore through an agricultural co-op,
toppling some big tanks, which sheared the valves off an anhydrous ammonia tank. "We had a release, which led to the evacuation of everyone within a mile of the facility," she notes.
Hurricanes Katrina, Irene and Sandy also raised issues. "They all caused flooding of areas that contained contaminants," Doering explains, "and caused that contamination to spread." The storms also caused water intrusion as a result of flooding, which resulted in mold.
"If there's an intrusion and flooding that involves contaminated water, including sewage resulting from a treatment plant overflow, you can have a rather large exposure, and a lot of cleanup," she says. "It goes well beyond just mold."
Flooding last fall in Colorado raised another issue. "There were reports of hydro-fracking wells and frack water ponds being overcome and distributing contamination," she says.
Weather and flooding can pose other environmental risks, Doering notes. "When the earth becomes saturated, underground storage tanks that aren't full can emerge from the ground," she says. "They decouple themselves from their piping, which can lead to releases."
Opportunities for agents
"Now is a great time for agents and brokers to ramp up the dialogue with clients about their environmental exposures versus the coverage they may currently have," Pritchard says. "It's important to be well versed on limitations that current carriers have and to develop smart solutions for addressing these.
"Don't just throw any environmental policy at the problem," he adds. "Pollution policies differ, and agents and brokers need to be sure they're teaming up with providers that offer quality coverage." Understanding coverages calls for either spending considerable time and effort to learn about policies or working with a reputable outside resource to help build the needed knowledge. "The benefits of doing it correctly will far outweigh the challenges," Pritchard asserts.
Doering encourages agents and brokers to have conversations with clients early and often. "Talk to all of your insureds that may have any kind of raw materials or waste on site," she advises. "Use weather as an anchor. Talk about what catastrophes might hit and what the likelihood is that a contaminant or waste might be released and spread over their site or the surrounding area."
Equally important, she adds, is to make sure that clients have coverage if there's any possibility of loss. "When you're talking about a really severe weather event, you want to make sure you address what could possibly happen to the insured's site and to their neighbors," she says.
"You can add to that a number of things, like business interruption coverage for after a contamination event, or other enhancements, from non-owned disposal coverage to transportation coverage and more."
Adds McElroy: "Brokers should look very carefully and make sure that pollution coverage that seemed appropriate in the past is still adequate. Sudden and accidental or time element coverage for environmental events is often not sufficient." He points out that it often takes time for even a serious environmental problem to become apparent. "Costs can be extremely high," he notes, "and legal defense expenses can be a major burden, even for those who may have no legal culpability."
Depending on the kinds of businesses that agents and brokers are working with, they may find loss control resources available from their property or general liability carriers that can help them point out gaps in the current program, Pritchard notes. "In addition, they can use the environmental underwriting process itself as a form of risk management. It actually can help the agent and insured identify exposures, quantify their significance, and assign a cost for transferring that risk."
He says that partnering with the right carrier can make the process a very positive experience for both the agent and the insured. "This can lead to a much stronger professional relationship going forward," he adds.
Doering encourages agents and brokers to learn more about client businesses and to get clients to answer some telling questions. "We hear a lot in the news about weather-related environmental losses, and along with that we hear talk of resiliency," she remarks, noting that agents and brokers should work with insureds to address the question of how they'll maintain business resiliency in the face of severe weather events.
"This certainly relates to environmental," she notes. "Insureds really need to take weather into consideration, wherever they're located. They need to know what significant or severe weather events might occur where they operate. What would the impact of a 100-year or 500-year flood look like? What is the likelihood of a tornado or a severe hurricane? How are they prepared to respond or to minimize loss as a result of that?
"The big events may be hard to manage," she adds, "but clients also need to address the more common scenarios. Make sure basic loss control and risk management tools are in place. If there's above-ground storage, make sure secondary containment is in place. Do what you can to mitigate the losses."
Pritchard recommends that agents and brokers find a partner they can trust. "Choose someone with a lot of experience and a track record of working with the highest caliber products," he notes. "Just as agencies outsource legal and accounting work to trusted experts, they really need to work with a firm that specializes in environmental risk to make the most of this significant opportunity."
McElroy points out that the environmental insurance marketplace has undergone rapid expansion in recent years. "Expansion of this type often is followed by an equally rapid contraction some years later," he notes. "Many new carriers entered the market over the past five years, which has resulted in significant pressure on rates.
"We continue to believe that broad areas of the environmental market are underpriced, relative to their inherent risk," McElroy comments. "Agents and brokers need to understand that terms that seem unsustainable probably are unsustainable for the long term."
Doering encourages agents to be confident in the environmental arena. "Don't be afraid of the coverage," she says. "Sure, there are a lot of bells and whistles—and it's important to know what you're protecting against—but the important thing to focus on is making sure there's some fundamental coverage in place. If a business has a potential contaminant on site, they should buy insurance.
"It doesn't need to be overly complicated," she adds. "And of course, if you do have a question—or if there's something you're not comfortable with—just ask your underwriter."
The author
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.
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