Rates Keep on Trucking

The ground transportation industry in Canada – whether movement of people or goods – shares at least one distinct thing in common with the property and casualty insurance sector: thin profit margins. In recent years, both industries have struggled with low single-digit returns on equity.

So, you might think insurers would have some sympathy for trucking carriers and taxi companies at renewal time. Think again. Insurers are aggressively re-pricing the business to what they regard as being “proper levels”. Large vehicle fleets of trucking companies and taxis represent one of the areas hardest hit by current market conditions. With capacity withdrawing, rates have climbed by between 30%-50% on so-called “good risks” with punishing increases of over 100% on poorly performing accounts. Safety practices are also pre-screened before quotes are even issued, and tough negotiations are taking place on policy terms and conditions. As a result, trucking and taxi groups say that underwriters are pushing some transporters into the Facility Association or even out of the transportation business altogether.

Insurers and brokers empathize with the concerns of the transportation industry and they are eagerly trying to explain the reasons behind rate hikes. But, “business is business” at the end of the day. After years of persistent under-pricing and growing claims, insurers are applying across-the-board premium increases to the commercial fleet market.

TRUCKING PERSPECTIVE

Insurance is an integral part of large fleets, whether for-hire freight carriers, privately managed trucking companies (e.g. retail or resource firms), couriers or small independent owner-operators. It is a major expense affecting these companies’ bottom-lines. And the players are paying close attention.

“Insurance is a major concern for the trucking industry,” says David Bradley, president of the Canadian Trucking Alliance, a federation of provincial trucking associations that represents 4,000 carriers. “Increases in insurance costs reflect a reduction in capacity and the crisis in the reinsurance market following 9/11. I have heard of increases as high as 200% in some cases and that some ‘lesser lights’ are finding they cannot get anyone to write their insurance for them. These kinds of increases can obviously have a major impact on profitability.”

Trucking in Canada is a $40 billion per annum industry, with more than 15,000 carriers across the country moving 90% of all consumer products and foodstuffs domestically and 70% of goods across the U.S. border. Figures from the Insurance Bureau of Canada (IBC) on commercial trucking are difficult to track, because many insurers lump these numbers in with general commercial auto.

Mark Ram, president and CEO of Markel Insurance Co. of Canada, estimates that the common carrier freight trucking market represents about $250-$300 million in insurance premiums. For the entire trucking industry, premiums are about $400-500 million, according to Steve Palmer, president of The Safety Group, one of the largest brokers of trucking insurance in Canada.

Insurers and brokers acknowledge that rates are increasing substantially, although some point out that the deep discounting of the late 1990s still leaves prices today behind 1995 levels. “It’s the law of numbers, it takes time to get back to the proper premium,” observes Ram, whose company writes about $150 million in premiums in the trucking business.

Elaine Collier, senior vice president and chief underwriting officer of Zurich North America Canada, says “some companies were writing well below book rates over the past several years. Step one is getting it back to book and then you have to increase from there based on individual loss experience.”

Bill Star, president and CEO of Kingsway Financial Services, says he has seen costs increasing in some cases from $3-4,000 per unit to $8,000 in Canada. “This line is just starting to become profitable again,” says Star, whose company writes about $70 million in long-haul trucking in Canada and $150 million in the U.S. through subsidiary Lincoln General.

Several carriers, such as AXA, Allianz, AI Transport and Lloyd’s, have pulled out of trucking insurance completely within the last three years. Ram estimates that 70% of the market has walked away or substantially withdrawn from Canadian long-haul trucking since 1999. “This is a tough line of insurance and it does have some peculiar characteristics,” he adds. “The premiums look good and lure companies in, but you have to add several thousands of dollars after those premiums for claims. In this business, you have to know how to underwrite, how to handle the claim and how to handle loss prevention.”

PREMIUM LURE

Ron Trecoce, a partner with Toronto-based brokerage Hargraft Schofield Ltd. and a trucking specialist, says some insurers are taking a lower profile in Canada. “Companies like Old Republic are underwriting very carefully right now and will likely become a smaller player here in Canada,” he says. “The other insurers will capitalize on that.”

Zurich considered exiting the long-haul trucking market back in 1997, according to Collier. “Our results weren’t where we wanted them to be,” she says. “But we substantially changed both our underwriting and pricing, and today we are in a better position. In this business, you are still pretty close to the wire.”

The cost pressures on the trucking insurance market are clear. A surge in cross-border traffic since the introduction of the NAFTA agreement has led to growing U.S exposures, especially in bodily injury cases and high-profile litigation. The number of multi-million dollar lawsuits and the average jury payouts in the U.S. have grown considerably in recent years – and truckers seem to be a favorite target of trial lawyers.

“There are a number of factors behind this trend, but one of the biggest is the fact that the (U.S.) general public, and the juries pulled from it, always find it easier to pin blame for accidents on a giant 18-wheeler than on an everyday car,” according to a Markel newsletter. Notably, Star says Kingsway was hit with its largest loss in a trucking incident last year, a $10 million legal settlement in Texas. A declining Canadian dollar also means claims in U.S. funds hit insurers even harder.

Another factor contributing to increased trucking insurance costs is newer, more expensive fleets, with sophisticated technology and safety equipment. This results in a higher actual cash value and greater costs to repair and replace vehicles. Sources say these pressures on the transportation industry were building for some time, with price wars, low deductibles and steadily growing claims heating the pot to a boil in the late 1990s. The terrorist attacks of 9/11 blew the lid off, especially in terms of reinsurance. Palmer says he is aware of trucking firms that have been crippled by insurance costs and forced out of the business.

He adds that increased reinsurance costs are the reason even “clean” accounts are getting double-digit rate hikes. “The other side is the primary companies,” Palmer notes. “They can decide how much of the reinsurance they are willing to pass along to clients. And that is where the volatility is in the trucking market today.”

TAXI METERS

Things haven’t fared much better for Canada’s taxi and limousine industry, where operators face a similar situation – higher premiums, reduced capacity and stripped-down coverage. “Insurance is a tremendous concern for us,” says Jim Bell of Toronto-based Diamond Taxicab Ltd. and a vice president with the Canadian Taxicab Association. “We have seen increases well over 40%. This is one of our major expense components, and you can be sure it will be passed along to the consumer through the meter.”

There are an estimated 28,500 taxi and limousine carriers in Canada, with total revenues of over $1.1 billion, according to Statistics Canada figures from 1999. Insurance premiums for taxi and limousine companies amounted to $33.9 million in 2000 for private sector auto provinces, with 4,286 claims resulting in $36.9 million in incurre d claims, according to the IBC (figures based on non-public insurance provinces).

Taxis represent a relatively small premium base and are written by a few players, including Kingsway, Lloyd’s and standard carriers, such as Zurich North America Canada. Star says most standard markets have reduced their appetite for the taxi business due to prolonged unprofitability, while others, such as Lloyd’s, have exited certain provinces altogether. Collier says Zurich “writes some taxi business, but it is not a target market. We are more interested in transportation of goods, rather than people.”

The “premium versus claims” numbers tell the taxi story, say insurance sources. “Taxis in many parts of the country, especially Toronto, have been severely under-priced for years,” says Star. “We are naming our price and we are willing to walk away from the business if we don’t get it.” As such, he notes that Kingsway has dropped its book of taxi business in Toronto by about $8-$9 million down to the $2 million level.

Another hotspot is Alberta, where taxi operators face a shortage of insurance markets. Allan Enders, a Calgary-based vice president with the Canadian Taxicab Association and president of Checker Cabs Ltd., says the recent departure of Lloyd’s from the provincial taxi market has left only one carrier – Kingsway. “This is not a good position for us to be in, nor is it quite frankly for the insurance industry,” Enders says. “I would like to see more flexibility in the marketplace. Four taxi companies have already been placed in the Facility Association.”

In British Columbia, taxicabs are not much happier about the current insurance situation. The Insurance Corp. of British Columbia (ICBC) announced last November rate increases for taxis, trucks and other commercial vehicles of 13%-15% on average. According to ICBC’s submission to cabinet, 49% of taxi drivers face annual increases of $500 or more in their insurance premiums. The public insurer says it pays out $1.64 in claims for every dollar it collects in premiums.

Taxi representatives in the province disagree. “We have been asking the ICBC for four years where they get their numbers from and we haven’t heard anything,” says Ted Allen, a vice president with the B.C. Taxi Association. “ICBC essentially won’t listen to us.”

Allen says his association wants to contract an independent actuary to examine the rate classifications of ICBC. “This is a big time issue for our member companies. It seems that every time there is an increase, taxis get screwed.”

“CREATIVE” SOLUTIONS

“It’s disturbing to see some of the rate increases clients are facing, but we are the messengers,” says Trecoce. “We have to manage our client’s expectations and make sure the insurance purchase is an educated decision.”

To counteract the effects of price increases, many transportation companies have raised deductibles or self-retentions from $5-$10,000 to $50,000 and higher. Most trucking firms buy primary coverage and then purchase an umbrella policy for excess liability. Some have been reducing the policy limits, from as high as $20-$25 million down to $5 million. “The ‘Cadillac’ policy isn’t there anymore,” comments Palmer. “Instead, carriers are getting stripped-down coverage and they are taking on a lot more of the risk.”

Taxis are also carrying higher deductibles and covering minor physical damage themselves. Some, like Checker Cabs, now also have their own adjusters. “I pay out more in claims than my insurance company, by a ratio of 25%,” remarks Anders.

Another strategy to tackle the hard market is to put real resources into solid loss prevention and safety programs. Specialist insurers say they can offer clients a range of services and training programs to help reduce losses. In a hard market, this area rises to the forefront – and some transportation companies are better than others. “A number of trucking companies have moved forward with loss control programs,” says Collier. “Others have to go through a market like this to realize the importance. It is staring them right in the face now.”

“We know there are firms that are professional and not professional,” says Trecoce. “The latter group causes headaches for us all – brokers, insurers and reinsurers.” Bradley, from The Canadian Trucking Alliance, acknowledges that a lack of insurance for less safety-conscious firms “is probably a good thing”.

Beyond grappling with retentions, limits and loss prevention, the beleaguered transportation industry may find alternative solutions, depending on the length and volatility of current market conditions. Bradley says the Canadian Conference of Highway Bulk Transporters is considering setting up a captive, but he cautions that plans in this regard are in the early stages. The Canadian Taxicab Association mid-year conference in Calgary in July will focus on how operators can deal with insurance market conditions. “This will be insurance 101,” observes Bell. “We need to give our members the tools to negotiate with insurers and brokers.”

A broader solution for insurers and fleet operators may be to join the insurance lobby for a more stable auto product. Many in the trucking and taxi industries have detailed knowledge about insurance, such as the varying effects of no-fault versus tort in certain provinces, provincial regulatory issues, fraud, healthcare and claims for non-pecuniary damages. “The problem with auto insurance in many provinces is that there are no safeguards in place to prevent fraudulent claims or abuse,” says Bell. “The governments have to step in and do something.”

In the short-term, however, the message for truckers, taxis and fleet managers is clear: budget for higher insurance costs, stick with a stable partner (both broker and carrier), put actual resources and dollars behind loss prevention programs and look at realistic alternatives such as higher self-retentions and lower policy limits. When it comes to insurance, several sources say the transportation industry faces a rough road ahead for at least 18 months.