Companies Pushing for Higher Premiums to Compensate for Losses on Investments

By Daniel P. Bearth, Senior Features Writer

This story appears in the April 27 print edition of Transport Topics.

The long downward trend in insurance rates for fleets may be coming to an end as more insurers push for higher premiums to make up for investment losses and as fewer underwriters compete for the business.

Industry experts said the days of double-digit annual rate decreases is almost certainly over, and motor carriers accustomed in recent years to seeing annual reductions in the cost of their insurance may be in for a shock.

“Now is the time to evaluate your current insurance program and make appropriate changes before rates increase,” said Shawn Young, senior vice president of The Marquis Agency, a unit of NIP Group in Woodbridge, N.J.

The market shift won’t mean an increase in rates for all fleets, however, because many companies have improved their safety records and the recession has cut the number of miles traveled and reduced payrolls, resulting in fewer crashes and injuries and lower overall risk.

A survey of insurance brokers and underwriters conducted by NIP Group in the fourth quarter of 2008 found the trend of premium decreases “moving in the direction of modest rate increases.”

“There’s a lot of unrest right now,” said Michael Lawrence, transportation sales manager for Roemer Insurance in Toledo, Ohio. “Insurance companies are testing the waters” to boost premiums, he said.

While signs point up, Lawrence said he doesn’t expect insurance rates to go “through the roof,” partly because many trucking firms are running fewer miles in response to a downturn in demand for freight hauling.

“Reduced mileage is reducing exposure,” Lawrence said.

Because insurance rates often are pegged to estimates of the number of miles traveled, Lawrence said he was able to cancel some policies midterm and rewrite them to reflect lower actual mileage.

The tough job market also is helping carriers to hire and retain more experienced drivers, and insurance experts say that trend is helping to improve safety performance.

“Carriers can be more selective,” said Todd Reiser, vice president of transportation for The Lockton Cos. in Kansas City, Mo. “I would be cautious, though, because there still is a shortage of very qualified drivers.”

Richard Augustyn, chief executive officer of NIP, said his company’s survey indicates that insurers are most likely to raise rates the most for small- and medium-sized trucking companies.

The survey indicated a slowdown in rate decreases for a broad range of insurance coverage — from accident liability to cargo and workers’ compensation — but the trend was more pronounced for firms that pay less than $250,000 in annual premiums.

Premiums for larger accounts continue to fall at annual rates of 10% to 20%, Augustyn said. The survey also found that fewer insurers were entering the transportation market.

Here are some of the recent changes in the market:

• Kingsway Financial Services said it was looking at “strategic alternatives” for Lincoln General Insurance Co., York, Pa., a major truck insurance underwriter that has experienced heavy losses in recent years.

“Lincoln General has been the main cause of losses beginning in 2007,” Shaun Jackson, president of Kingsway, said in reporting a $360.4 million loss in the fourth quarter.

“We are looking at strategic alternatives in conjunction with the Pennsylvania Insurance Department regarding the future of Lincoln,” Jackson said. “The outcome of these discussions may have a bearing on our capital position.”

• Liberty Mutual Group announced in February it would turn over distribution of its commercial property and casualty business to three insurance brokerage firms — Arthur J. Gallagher & Co., Hub International Ltd. and USI Holdings.

J. Paul Condrin, president of Liberty Mutual Commercial Markets, said the middle-market business is dominated by independent agents and brokers who can offer risk management services to clients.

“There is pent-up demand for our product and brand, and we think the best way to satisfy that demand is by distributing via agents and brokers,” Condrin said.

• American International Group, considered to be the largest provider of commercial auto liability insurance to the trucking industry in the United States, agreed to sell its personal auto insurance business to Farmers Group, a subsidiary of Zurich Financial Services Group, for about $2 billion.

AIG officials said the deal with Farmers Group does not include the company’s trucking insurance business and that AIG continues to be active in the market.

The U.S. government injected $40 billion in capital and provided $60 billion in loans to AIG to stave off collapse, following the meltdown of the company’s credit insurance business in 2008.

“We definitely see the market hardening,” said Jeff Benzin, vice president of casualty underwriting for Zurich.

Zurich is the nation’s third-largest commercial auto and workers’ compensation underwriter.

Experts expect to see a gradual shift from a “soft” market, in which rates fall, to a “hard” market, in which rates rise, because insurers have experienced a reduction in reserves needed to support insurance underwriting.

A.M. Best Co., a rating agency for insurance companies, said total policyholders’ surplus for U.S. property and casualty insurers was expected to decline by 10% to $485.3 billion at year-end 2008 from $538.2 billion in 2007. Final figures for the year were not yet available.

Commercial auto insurance makes up $24.3 billion, or 5.4% of $449.7 billion in total net premiums written by property and casualty insurers in 2008.

Insurers paid out 98.5% of commercial auto net premiums written to cover claims and expenses in 2008, compared with only 94.2% of net premiums written in 2007.

In 2009, A.M. Best said it expects underwriting results to worsen, with a combined ratio of 101.5% and income from investments remaining at very low levels.

Nevertheless, A.M. Best analysts said the overall outlook for the U.S. commercial insurance market is “stable” and that rates “will continue to be soft and competitive well into 2009.”

“The market right now is leveling off,” said Gary Weindorf, president of Interstate Motor Carriers Agency in Freehold, N.J.

“We don’t see many [premium] reductions,” he said. “We also don’t see many increases. There is an underwriting process going on. Companies with better loss numbers and that have safety programs in place and that are hiring better drivers — those are the things that are taken into consideration in setting the rate.”

However, competition is expected to limit the ability of insurers to increase rates for trucking policies.

“Companies that do trucking insurance are trying to talk up the market, but it hasn’t worked,” said Ron Inberg, executive vice president of McGriff, Seibels & Williams Inc. in Portland, Ore., a brokerage firm owned by commercial bank BB&T.

Inberg said rates on insurance policies renewed in April have been “flat.”

Greg Bonnell of Motor Truck Underwriters, Indianapolis, said that although he expects a tightening of the insurance market, it hasn’t happened yet.

“It’s still a soft market,” he said.

Joe DeVito, president of Baldwin & Lyons, Indianapolis, an insurance company that specializes in trucking, said he expects total premiums from the company’s large-fleet accounts to drop as much as 25% this year, with premiums from owner-operators remaining level and small-fleet accounts to be down.

“We’re still experiencing fairly aggressive pricing on new accounts,” DeVito said. “The rate of deceleration is less, but I’m not ready to declare an end to the soft market.”

David Berno, chief sales officer for Hub International Transportation Insurance Services, said trucking-related fatalities and accidents have dropped in recent years because of a combination of stricter federal regulation and improved safety management efforts by motor carriers.

Fleets are putting “a lot of money and effort into risk-management programs for drivers,” Berno said. “I believe there is a direct correlation between lowering fleet premiums and the money being put into risk-management and safety programs.”

Conversely, fleets that cut back on safety programs or truck maintenance during periods of economic stress can make matters worse, said Greg Feary, a principal with Scopelitis, Garvin, Light, Hanson & Feary, an Indianapolis law firm that represents trucking companies in accident litigation and insurance matters.

“You could potentially see situations where poorly maintained trucks cause more accidents,” he said.

The poor state of the economy could have other effects on workers’ compensation insurance.

A recent congressional report on workplace safety and health found that as many as 69% of all injuries and illnesses may go unreported, in part, because workers are worried about losing their jobs.

Robert Petrancosta, vice president of safety for Con-way Freight Inc. in Ann Arbor, Mich., said he doesn’t believe that underreporting is a major issue in trucking.

“As a general rule, drivers aren’t the type to whine and complain,” he said. “The focus is on prevention. Ninety-nine percent of the time, injuries are preventable.”

Ron Uriah, vice president of safety at Pitt Ohio Express, Pittsburgh, said his company promotes wellness, asking drivers to do stretching exercises for the first 15 minutes of their shift and advising employees on time management, weight control and stress reduction.

Uriah said the goal is to reduce the number of claims and the amount of time lost on the job.

“We have reduced costs in all areas,” he said.

Howard Fowler, chief financial officer of TransForce Workforce Solutions, a driver leasing firm with 500 to 900 employees, said workers’ compensation claims are down, but costs are up as the cost of medical treatment continues to rise.

“The biggest problem for our drivers is personal health issues,” Fowler said. “If folks are not healthy and they have a job that requires some physical effort, then a diet of cigarettes and doughnuts doesn’t help. The average age of truck drivers is also higher. Combine all those things, and what we try to focus on is prevention.”