Opinion: Alternative Risk Transfer Options

By Chris Mikolay

Director of Marketing

National Interstate Insurance Co.

This Opinion piece appears in the Dec. 13 print edition of Transport Topics. Click here to subscribe today.

Ensuring the safe delivery of every load should be a top priority in the trucking industry. Yet, even with the most sophisticated technologies and best risk-management techniques, bad things can happen to good people — or good carriers.

Trucking is an inherently risky endeavor, and properly managing its risk is no easy task and can be puzzling, given the vast array of insurance and risk financing options available to the trucking industry.

Smart fleet owners and executives should take the time to properly understand (1) the variety of ways in which risk can be transferred, (2) when it should be retained and (3) how various risk-financing techniques affect a fleet’s cash flows and bottom line.

These considerations are particularly important today, as we appear to be emerging from the worst economy since the Great Depression of the 1930s.

Interestingly, while the economy worsened over the past decade, premium prices for trucker liability insurance, workers’ compensation and other major lines of insurance for the trucking industry have steadily decreased as a greater number of insurance carriers entered the trucking market. With an increase in the available supply of insurance, truckers have been able to buy increased limits of insurance at historically low prices and with expanded coverage options.

Some trucking insurance experts believe premium prices may be bottoming out. As losses mount with the insurance companies that have been selling insurance at unsustainable or inadequate rates, some insurers will undoubtedly exit the trucking market, thereby causing prices to rise rapidly with this diminished supply of capital.

If insurance pricing truly has reached its lowest point, this is the ideal time for fleet owners to investigate alternative risk transfer programs.

An ART program is an insurance program created specifically to insure only the risks of a single company or a defined group of companies. Once only available to very large firms — and often formed in response to hard insurance markets or to address unique coverage needs — ART program participation has grown even during the current soft insurance market.

Today, ART programs insure everything from trucker’s liability to workers’ compensation, and some group programs will insure fleets with as few as 30 power units.

In an ART program, the participant pays a premium similar to a guaranteed-cost policy, but a portion of that premium is designated to pay for expected losses up to a certain limit. If the participant has fewer losses than expected, a portion of the premium may be returned, along with any investment income accrued. Conversely, if losses exceed expectations, the participant will pay additional premium up to a specified maximum.

However, unlike traditional insurance products, ART premiums are not determined by the whims of the insurance market but largely by the trucking fleet’s loss experience. For better operators, this means the long-term cost of risk can be substantially lower and more stable than if the participant had been insured with a more traditional product, and it is a primary reason why better operators continue to migrate to this insurance option.

Generally speaking, companies with cash flow concerns might find large deductible policies to be the most attractive short-term option for reducing upfront premiums and alleviating immediate cash flow concerns. However, fleets must consider the “total cost of risk,” including policy premium, deductible payments and, importantly, collateral requirements. For companies in a stronger financial position, the long-term stability of ART program pricing and lower collateral requirements make this form of insurance an attractive way to control total cost.

ART programs are not for everyone, however. If the program is not properly funded, or if the trucking firm is looking for a short-term solution and is not committed to exceptional safety practices, the program may perform poorly. To work properly, a participant must have a longer-term vision, partner with insurance companies and agents that have expertise in alternative risk products and, above all, understand the product.

There are many myths and misconceptions about alternative risk, and navigating this field of insurance requires expert and unbiased advice. First, find an insurance agent who understands ART and has access to these solutions. Second, when presented with options, demand transparency from the agent and insurance carrier about how premium dollars are spent, what the best and worst case claims scenarios are, and how premium and collateral are to be returned. Finally, when exploring a group option, ask for data highlighting past financial performance and speak with current members about their experience in the program.

As long as rigs roll along our highways, trucking will remain a risky endeavor. An ART program is an innovative risk-management solution, and today’s soft insurance market makes this the ideal time to investigate “locking in” attractive long-term rates. There are more options than ever for trucking companies, both big and small, but success really depends on a long-term commitment and choosing experienced alternative risk partners.

National Interstate Insurance Co., Richfield, Ohio, is a specialty property and casualty insurance company that focuses on the transportation industry.