Trucking industry revenue continues to increase as industries that previously used other modes of transportation return to over-the-road transportation.
Unfortunately, the industry is currently facing a significant shortage of experienced drivers. This is causing serious concerns to the insurance industry because trucking firms are starting to use less experienced drivers and also drivers who have problem driving records.
Workers compensation, inland marine-transit, and automobile are the key coverages that trucking firms and owner-operators need. Driver error is the primary cause of loss for each of these coverages. Not surprisingly, the insurance industry is very interested in the trucking industry using the best drivers possible. This means that the types of drivers also drive the premiums.
RESPONDING TO TRANSPORTATION INDUSTRY CHALLENGES
From complex regulations to inexperienced drivers, transportation firms face plenty
By Dave Willis
At the heart of commercial enterprise is the ability to move goods from one place to another. Central to this is trucking-an industry that enables commerce and, at the same time, provides significant opportunities for retail insurance agents and brokers. Success, experts say, comes by understanding the business and its exposures and bringing responsive products and services to the table.
Transportation firms face a number of important business challenges in 2015, but finding qualified drivers tops the list. "The biggest issue facing the trucking industry is the shortage of drivers," says Tom Kane, national sales executive at NSM Insurance Group's True Transport Insure. "The market still has not provided enough drivers to equal out the amount of inventory or loads that can be hauled."
Teri Greenwood, chief underwriting officer at Northland Transportation, points out that fewer new drivers are entering the business. "That means as drivers retire, some companies can't fill the seats and have to park their trucks," she says. "Parked trucks aren't generating revenue to cover costs, which impacts their income statement and their ability to service their customers.
"Companies compete for drivers and look for ways to increase driver retention through compensation and other incentives," she adds. "As the economy improves and demand for freight increases, the shortage will continue to squeeze capacity."
Lou Welch, vice president at Scottsdale Insurance Company, concurs, citing a contributing factor as constrained rail capacity resulting from surging crude oil shipments. "Many shippers who traditionally used rail to move freight are relying more on trucks," he says. "Adding trucks when there's already a shortage of qualified drivers is a major issue." His firm has seen what he calls "a significant increase in requests from insured customers that want to hire inexperienced drivers or drivers with undesirable driving records."
Regulation is another challenge. "Regulations continue to get more complex," explains Sam Rizzitelli, national director of transportation for inland marine at Travelers. "That's one of the contributors to the driver shortage issue, but it has a lot of other ramifications that the transportation industry has to solve as well."
One such regulation involves MAP-21 law changes that took effect recently. "This has moved many trucking companies into the category of 'property brokers,' " explains Grant Goldsmith, CIC, CRM, vice president at Avalon Risk Management. "A property broker is a third-party logistics company that brokers a load to another motor carrier rather than hauling the load under its own assets."
He points out that many trucking companies farm out loads to other trucking companies when they don't have the capacity or special hauling vehicles to haul certain loads. "When a trucking company does this, it's acting as a property broker per the MAP-21 law," Goldsmith says. "This is no longer considered 'interlining,' except in narrow circumstances as defined by the regulation."
Absence of regulation can post other challenges. "One of the most costly issues trucking firms face is the 'towing and recovery' expenses," says Clayton Hartley, director of specialty marine and transportation at Engle Martin & Associates. "It's not uncommon to get a bill of $30,000 for a wrecker to come out and hook up to something."
He cites an abuse of power and a lack of regulation as contributing to the problem. "We've seen insurers, in the last couple of years, put a towing and storage sublimit on the coverage to fight that," Hartley says, "but it's still a matter of inadequate regulation of towing facilities."
Workers compensation is another challenge transportation businesses face. "The trucking industry is aging and the comp markets are finding it more difficult to attain profitable customers, as an older driver tends to take longer to heal," Kane notes. "This has created great stress in the trucking industry, as costs continue to increase year over year."
Trucking insurance
Kane points out that the insurance market continues to be hard, particularly for smaller trucking companies. "Small, regional firms are being forced to affiliate or become agents for larger companies to help offset the insurance cost," he explains.
According to Hartley, market hardening is a result of claims frequency and lack of quality drivers. "Inexperienced drivers lead to accidents," he points out. He says he believes a number of insurers have experienced poor loss ratios. "We're seeing more and more of the business go to the London Market, where they get higher premiums," he adds.
Welch sees a relatively competitive trucking insurance market, with prices continuing to gradually rise. "Depending on the specifics of each client, rate increases in the high single digits are average," he explains. "Some risks are facing much higher increases, as companies continue to move toward predictive modeling and shed unprofitable areas of their book."
Greenwood agrees. "Trucking companies pay different insurance rates based on a number of considerations," she says. "These include the quality and execution of their safety program, driver management practices, and the company's loss experience."
She points out that insurers face the same cost pressures from inflation as trucking companies do. "In addition to inflation related to parts and labor to repair equipment damaged in an accident," she explains, "the costs of medical care continue to trend up and impact insurers' costs for bodily injury and workers compensation claims."
Adds Welch, "Each year, we see a handful of carriers make a push to grow, generally in more difficult states, only to pull back two years later." He encourages agents and brokers to place business with stable carriers to avoid large price fluctuations or unexpected non-renewals.
Covering exposures
Transportation industry firms sometimes find themselves with coverage gaps or challenges. "Workers comp can be a problem area," says Kane. "It's imperative that agents and brokers work with customers to make sure they understand their MOD."
Owner-operators have their own comp-related challenges. "There are alternatives for these individuals," explains Tina Miller, executive director at Sole Proprietor Solutions. "We offer a program, for instance, that includes a workers comp ghost policy that excludes the owner for coverage, but we pair it with a 24-hour accident policy that does cover him or her." The program is for owner-operators with no employees, subcontractors or day-laborers.
Another challenge or gap trucking companies face involves contracts. "It's important to make sure insureds have the right agreements or contracts in place to protect their interests," explains Greenwood. "Fleet and owner-operator leases, as well as broker agreements for example, should be written clearly in order to achieve the intent of the business relationship."
"We are seeing many requests from shippers and brokers for additional insured endorsements, hold harmless agreements, waivers of subrogation, and primary and non-contributory language," adds Welch. "In many cases, the shipper or broker is requiring that the trucker provide these documents or sign a contract containing these items before they will give the trucker a load."
Often, he notes, these demands aren't in the best interest of the trucker, and they may be agreeing to accept liability exposures that are not covered under their insurance policy, thus putting the assets of their company in jeopardy. "Customers would benefit from having such documents reviewed by their insurance agent before signing them, assuring that they have appropriate coverage for the exposures they assume," Welch says.
Greenwood adds, "A lack of clarity around contractual arrangements leads to the potential for claims to be paid that were not expected or intended as part of the arrangement between the parties."
Goldsmith encourages agents to understand property broker issues to ensure these entities are adequately protected. "Coverage requirements include professional liability (E&O), contingent auto liability, contingent cargo coverage, excess pollution coverage, crime coverage, fraud and identity theft coverage and shippers interest cargo coverage," he says.
He points out that claims are based on the broker-carrier agreements between property brokers and motor carriers. "They also are enhanced or modified by the shipper-broker agreements," Goldsmith notes "These get more and more complicated as shippers move more and more liability to the property brokers they hire to coordinate their moves."
Carrier selection processes of the property brokers and insurance verification of carrier's insurance is also a big part of managing this risk properly.
Rizzitelli says evolving perils are affecting insurance and need to be addressed. "The commodity of perishables, everything from fruits and vegetables to dairy products to pharmaceuticals, has been changing as the equipment used to keep it at proper temperatures has evolved," he explains. "Also, equipment has become more complex and sophisticated as it integrates computer technology and telematics.
"All of that is in transit," he adds. "These new complexities and developments are new twists on the exposure in transit. There's more value and complexity." Technology and telematics have helped the trucking business. "They've made temperature and location monitoring much better today," he notes.
Theft is another major peril. "The primary way to steal cargo today is still straight theft-sneaking up on a truck when it's parked and driving it away," Rizzitelli notes, "but the fastest growing means of theft are through technology and scams. They've been categorized in three groups: identity theft; fictitious pickups or imposters; and frauds."
Identity theft involves thieves going online and acquiring enough public information so they can pretend to be a carrier and take a load in its name, he says. "Fictitious pickup is similar. Thieves actually intercept the information between a legitimate carrier and a shipper or intermediary, then arrive before the pickup time and impersonate the actual carrier that's on the way.
"Pure fraud is when the bad guys actually create what appears to be a legitimate carrier operation, complete with tractors and trailers," Rizzitelli explains. "They may even operate as carriers for a while to gain the trust of shippers and intermediaries who will then tender to them high value loads, which they disappear with." Too often, he adds, "transportation industry businesses are underinsured for these types of theft."
Managing claims
According to Greenwood, the types of claims truckers experience are fairly consistent. "Generally, the most expensive claims are rear-end accident claims and the most frequent are caused by a loss of control," she says. "Educating customers about maintaining safe following distances and speed control can help control loss costs."
Welch points out that claim costs associated with physical damage and cargo losses have continued to trend upward in severity for a number of years. "Repair costs increase significantly on newer equipment, and towing costs have continued to be a major cost drive," he says. "Agents should be careful to analyze the coverage differences from carrier to carrier, as things such as towing costs and cargo coverage forms vary greatly."
Hartley cites driver inexperience as a serious issue. "We see an enormous number of drivers with very limited experience. That's one of the biggest challenges we have. Training programs are available, but smaller fleets, especially, put drivers right to work as soon as they get their CDL."
Back and knee claims also are common, according to Kane. The biggest issue is that drivers aren't healthy," he notes. "Too often, they're overweight and they don't get much exercise. Agents can help make customers understand that, for instance, paying $29.95 for drivers to belong to a national gym could go a long way toward reducing trucking firm comp claims."
Theft claims, Rizzitelli points out, are controllable. "Risk management of this issue is the first line of defense," he says. "Carriers can bring risk control services to the table and advise clients on how to improve their operations to help prevent these losses and to make it more difficult for scams to occur."
Parting counsel
Greenwood says the trucking industry will change over time, thanks to advancing and less costly technology. "Used effectively, technology can improve safety, reduce costs and increase efficiencies," she notes. Examples include fuel management, driver behavior management and asset tracking that can lead to better customer service and lower costs for trucking companies.
"Today, many smaller to mid-size fleets find these technologies to be cost-prohibitive," she adds. "However, as costs decrease, effective use of technology will help keep these companies efficient."
Hartley says it's important to understand how various insurance companies operate, particularly in an era of increased commoditization. "Customers in certain markets may see different-often lower-service levels than they may have had elsewhere," he explains. "Make sure these customers have realistic expectations. Today everybody expects you to write them a claim check on the spot. Well, that doesn't always happen."
Kane stresses the importance of understanding the industry and getting proper protection for accounts. "I see many accounts that are inadequately insured, because the agent and the client aren't fully aware of what it takes to properly protect a trucking client," he explains. "Each account needs to be understood properly and the agent needs to make sure the coverages match the firm's operations."
Rizzitelli agrees. "Cargo coverages, for instance, have traditionally been an unregulated class of business that has to be tailored," he explains. "You have to look at every risk individually, and assess each one to understand their unique exposures.
"Transportation providers come in a lot of shapes and sizes," he adds. "Recognize that and focus on really understanding the unique nature of every insured, and make sure you have the right insurance in place for that particular exposure."
The author
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.
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