Specialty Lines Markets
FOCUS ON COMMERCIAL AUTO AND TRUCKING
Market faces claims pressure and coverage concerns despite strong numbers
By Lori Widmer
If one looks merely at the numbers, the commercial auto and trucking industry is enjoying a great year. According to a report released by American Trucking Associations (ATA), trucking industry revenue exceeded $700 billion in 2017, representing nearly 80% of the country’s freight bill. Last year, the industry employed 7.7 million people, 3.5 million of whom are drivers. The ATA also found that the median salary for truck drivers working national, irregular routes topped $53,000, a $7,000 increase since 2013. Private fleet drivers saw pay increase 18% to over $86,000 on average.
Yet the numbers can be deceiving. Commercial auto and trucking-related activities are also experiencing plenty of market pressure that keeps both motor carriers and insurance carriers alike from rejoicing. More freight business means more exposure to claims stemming from accidents, more pressure on the industry to fill a growing number of driver positions, and an increased risk of putting untrained drivers behind the wheel.
“The sad fact is for the last 20 years, commercial auto and workers compensation have been the loss leaders of the P-C industry,” says Ward Stein, president of Greenwich Transportation Underwriters.
“We suffered for years from what we call naïve competition,” says Stein, who cites a Conning report that shows a 30-point gap between top performing insurers and bottom performers. “The top quintile of performers experienced a combined ratio of 88.8% while the combined for the bottom quintile was 118.4. That points to the absolute necessity of competent product management, underwriting and actuarial all working together to really understand the business segment,” Stein says.
Yet other factors are indeed impacting the market. Thanks to poor loss history combined with inadequate rates, the commercial auto market has had a rough decade, says Mark Sullivan, transportation unit team leader for Midlands Management Corporation. Sullivan says many insurers and reinsurers are moving away from the transportation industry, the trucking side in particular. “The auto market in general is seeing such unfavorable results that most companies aren’t just pulling back on their appetite but they’re leaving. The reinsurance market over the last year or two has really tightened. That’s why you’re not seeing much market out there. There aren’t very many new markets coming in.”
Brenda Ryberg, hazmat trucking program manager for Freberg Environmental, says that new market entrants are jumping in, but they’re not staying. “They come in for a short stint, then they leave. I think it’s due to inadequate rates and combined ratios everyone is experiencing.”
That’s having its effect on pricing, says Chris Demetroulis, managing director of Gallagher’s Transportation Services. “We’re in the 28th straight quarter of increases for auto liability and physical damage. If you do any industry wide measure, you’re seeing between five and eight percent increases in just this last quarter. Of course that will vary depending on whether it’s primary auto liability, buffer-layer excess or high-layer excess.”
Even with such a long run of rate increases, Keith Stephenson says that profitability in the commercial auto and trucking industry continues to decline. Stephenson, vice president of commercial auto for Southern Insurance Underwriters, Inc., says carrier results may be improving but are still not where they need to be. As a result, carriers continue to increase rates, he says.
Demetroulis says carriers are still underwriting to the specific client to try getting ahead in terms of profitability. Plus, he adds, “there is rate pressure across the board for books of business to be increased from the insurance company side. Couple that with transportation companies seeing increased revenue and exposure, and that compounds the number.”
In order to address the profitability issue, carriers are restricting underwriting. Sullivan has seen coverage restrictions that pare down policies to the basics mainly due to the accounts they handle. “Certain carriers do have some preferred coverage for preferred risks, but most of the motor carriers we see fit within the nonpreferred risk category.”
Carriers are also trying to readjust their focus, and use some standard methods to eke out profitability. Stephenson says, “They’re still trying to redefine the liability coverages. There are some carriers trying to adopt one deductible for physical damage for the truck and the trailer.”
Even with such measures, claims across the transportation industry still involve accidents, inadequate safety measures, and lack of proper training for drivers. There are more trucks on the road and fewer experienced drivers, says Ryberg, a scenario that’s increasing exposure. She cites the petroleum industry, which is doing well in the market. “In that particular field, we’re seeing significant growth. Last year you may have had a fleet of six and this year it’s a fleet of 16 or 20. They’re growing a lot. Yet, they’re having a hard time getting experienced drivers.”
Demetroulis says everything from the aging driver force to highway congestion increases exposures, but so does distracted driving, which he says was the cause of 64% of accidents in the 2017 calendar year. “It’s all about culture and training. However, it’s very difficult. It’s ingrained in people that every time a text message comes in on your phone to look; it’s tempting,” he says.
Another big concern, Demetroulis says, is the age of drivers. Recruitment and retention continue to be big focus areas. Retention seems to be getting the most funding, he says. “You’re not having a lot of young drivers coming into the force, so you’re going to continue to see an increase in the average age of drivers. That will expand the driver problem and contribute to accidents.”
Even those companies able to recruit new drivers are running up against issues, says Stephenson. “A lot of it is newly hired drivers who are not familiar with the equipment, or drivers who are not used to the routes. The driver shortage is causing a lot of operators to take on marginal drivers, which again is driving rates.”
Stephenson says there are a lot of proposals circulating for how to address such issues, but he sees little the industry can do to improve the driver shortage without making some unconventional changes such as relaxing driver standards. Most carriers, he says, will not underwrite drivers who don’t have a minimum of one year of driving experience. “The carriers that do allow those drivers surcharge the policy, so it’s a double whammy.”
That’s going to hurt the smaller motor carriers, which, says Sullivan, experience more catastrophic claims—neck and back injuries. Another issue, he says, is the insurance carriers’ rush to get a settlement. Insurers, he says, are setting a bad precedent by settling claims too quickly in order to avoid any litigation. “Something that could be a $2,500 claim or maybe shouldn’t have been a claim at all, they’re writing a check in order to avoid a $25,000 claim,” Sullivan says.
Stephenson agrees. He says the increasing prevalence of plaintiff attorney advertising is creating problems. “It’s to a point where any minor fender bender is an issue.”
It has the industry talking, says Ryberg. She has read about huge claims where jury verdicts hand out millions of dollars. While she hasn’t experienced that directly, it is happening and is a concern going forward. “People are talking about that all the time—how do you limit that; how do you underwrite that? Neither underwriters nor insurers can accurately predict runaway jury awards, so we do the best we can by evaluating insureds for gross negligence exposures around safety and maintenance, as well as hiring and training.”
It may be a question that carriers find more difficult to answer as claims increase in frequency and scope. “We are seeing an exponential spike in multi-million-dollar auto accident claims, both on the liability side and third-party brokerage liability,” says Demetroulis. “We’re seeing increased litigation in third-party contingent auto and truck broker liabilities. It’s an area where very few people have expertise. That’s a place where you really have to understand how the policies match up.”
Another liability that insurers may not be able to control is the emergence of third-party litigation funding. Stein says the practice involves a third-party financier providing money to an attorney to finance a suit in exchange for a portion of the settlement, a risk that Stein says many are talking about, but that he hasn’t seen personally. “It’s a speculative bet that it’s going to provide a big return to the investor,” Stein says.
Then there are what Stein believes are outdated liability limits—limits that he says haven’t changed in 30 years. He mentions the $750,000 to $1 million minimum required coverage and a $5 million hazmat minimum requirement. “No one in their right mind thinks those are adequate limits when there is a serious loss in place,” says Stein. He points out that private consumers often purchase personal umbrella policies affording $1 million limits for personal vehicles. “It’s time for regulators to bump that up.”
Other coverage concerns
It’s also time for motor carriers to take cyber risks seriously, say the experts. Demetroulis says that cyber liability is certainly a concern for the operational side of the transportation industry. Like most industries, transportation is just as vulnerable to ransom and phishing schemes, which Demetroulis says are on the increase.
The larger problem, he says, is the general misunderstanding about cyber liability products and vulnerabilities. “People tend to buy cyber insurance and think they are protected,” Demetroulis says. “That’s when we get into off-the-shelf coverage versus something that is specifically tailored to their business. On top of that, policy forms have not kept pace with rapidly changing cyber concerns. For example, some auto and general liability policy forms exclude bodily injury for cyber-related claims. That can be a devastating financial loss if a client thinks it has purchased the coverage.”
Another risk that is finally getting some notice is liability for the supply chain. Stein, whose organization provides coverage for truck brokers and logistics operations, points out that over 40% of all freight goes through some portion of the logistics supply chain. He says coverage to limit liability from supply chain issues is something all agents and brokers should be adding to their offerings. “[Having the coverage] improves the utilization of equipment; therefore, it positively impacts profitability of the truckers. It’s something we’re encouraging our agents to become more aware of to increase their under-standing of the intricacies of that coverage and the need for that coverage.”
Advice for agents and brokers
How can agents and brokers navigate a line of business that is involved in an extended balancing act? Ryberg believes agents and brokers need to help their clients get back to basic safety and risk management processes. She recommends that agencies and brokers get clients using online resources to improve their vehicle inspection scores, driver ratings, and vehicle crash ratings.
Stephenson says carriers do have some controls they can implement. “If carriers started mandating some type of control over the drivers, that would help the industry in more ways than one. The driver is your risk. The only thing we can try to get control over is the driver. The only way to get that data is through telematics.”
Agents and brokers, says Sullivan, should be advocating for the use of cameras and other telematic devices to help motor carriers reduce risks. Such data, he says, will give motor carriers hard evidence in any court proceeding involving claims.
That advocacy should extend to all aspects of the motor carrier’s business, says Demetroulis. “You have to have a client who understands what the risk is once you deliver the message. Then hopefully they decide to mitigate the risk in the best way for their business.”
For more information:
Freberg Environmental Insurance
Gallagher Transportation Services
Greenwich Transportation Underwriters
Midlands Management Corporation
Southern Insurance Underwriters
Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.