Coverage crash course

by John Curran

TORONTO, Ont. – Average trucking insurance premiums in both Canada and the U.S. have been climbing in recent months.

While this does not necessarily mean your rates will increase when your policy renews, it is however a possibility. According to many industry insiders, the reason premiums are suddenly rising at a rapid pace is thanks to many different factors negatively affecting rates at the same time. And some of the most significant influences behind today’s increases are the same pressures driving insurers from the trucking market altogether.

Lawsuits on the rise

There is no doubt most long-haul Canadian truckers depend on runs into the U.S., but this very opportunity brings with it the big risk of operating in an environment rife with lawsuits.

Both the number of multi-million dollar suits and the average U.S. jury pay-out have been escalating in recent years.

There are a number of factors behind this trend, but one of the biggest is the fact the general public, and the juries pulled from it, almost always find it easier to pin blame for accidents on a giant 18-wheeler than on an everyday car. Foreign trucks from Canada are even less popular in these cases.

Beyond this, the actual cost of medical treatments for those injured has also been rising steadily. According to consultant Watson Wyatt Worldwide, these costs are expected to rise again by 15 per cent in 2002.

It might as well be Canadian Tire money

The fact U.S. claims are increasing rapidly is compounded by the decline of the Canadian dollar.

The Loonie continues to lose value against its U.S. counterpart. As a result, more Canadian dollars are needed to pay for each claim over time. Currency fluctuations are an unavoidable reality, but the fact the Canadian dollar has lost approximately 23 per cent of its value against the U.S. dollar since 1995 leaves Canuck truckers and their insurance companies paying the difference.

Today, a $5 million jury award in Arkansas, for example, will cost a Canadian company roughly $8 million at home.

Higher equipment costs

The average age of equipment used by Canadian carriers has been trending downward as newer vehicles continue to hit the road. Modern equipment brings with it many benefits, such as better fuel economy, greater safety and enhanced comfort, but these benefits also come at a cost.

Most equipment today is extremely sophisticated, resulting in very high replacement and repair costs. In trucking, this has meant thousands of dollars added to the amount of each physical damage claim. Costs that ultimately must be covered by higher premiums.

Terrorists attacked insurers, too

The impact of Sept. 11 on the world is unprecedented, as was its impact on the global insurance industry.

The estimated US$60 billion loss to date resulting from this tragic event eclipses the previous largest loss ever recorded by the insurance industry – Hurricane Andrew of 1992, which cost US$18 billion. While most companies will never see a single claim as a result, they will however bear the burden of this event along with industry and the general public.

Based on this statement, you are likely asking yourself a simple question: “If an insurance company didn’t pay any claims as a result of Sept. 11, why would they have to raise their rates?”

The answer is that insurance companies in general now face significantly higher costs for the ongoing reinsurance protection they purchase.

Quite simply, the terrorist attacks shocked reinsurers worldwide with a previously inconceivable level of risk.

Bargain days are over

All of these costs are significant drivers of today’s increasing premiums. But there is another very serious cause that doesn’t often get public attention. Long before the increases began, extreme competition had driven premiums in almost all areas of insurance to rock bottom – in fact they didn’t even cover the basic costs of doing business.

Most insurance companies have been losing money on policies for years, with these losses averaging 10 cents on each premium dollar collected.

It’s a situation that doesn’t seem to make a lot of sense, because you know that you wouldn’t find these results acceptable in your business.

It evolved out of the red-hot stock market in the years leading up to the recent recession. Insurance companies of all types have been able to offset their operational underwriting losses with investment income.

Since investment returns have all but disappeared in today’s environment of weak stock markets and very low interest rates, insurance companies can no longer afford to subsidize their underwriting operations.

The impact on truck insurance

There is no question long-haul trucking insurance is an extremely specialized, high-risk business.

The large premiums often attract general insurance companies with no specific knowledge of trucking.

These inexperienced insurers may in fact try to lure away your business with one-off, cut-rate premiums in an attempt to build market share.

However, this type of insurer often will not last long in trucking, because there is certainly no magic formula in the truck game.

Fleets and O/Os face the same challenges from inexperienced competitors willing to discount rates and undercut the market – this under-pricing often results in problems down the road.

In fact, long-haul trucking insurance has historically had one of the most unprofitable track records of all lines of property and casualty insurance in North America.

Compared to the average loss of 10 cents on the dollar experienced by general insurers, many inexperienced trucking insurers are estimated to have been losing upwards of 50 cents on the dollar in recent years.

The results are clear – an astounding 70 per cent of insurers have walked away or substantially withdrawn from the Canadian long-haul trucking insurance marketplace since the end of 1999.

What can you do?

Controlling insurance costs is possible but will require a shrewd business sense in the coming years. In the end, truckers will benefit from doing business with an insurance company that truly understands the specialized risks associated with long haul trucking, one that knows that a fifth wheel isn’t the steering wheel. And when it comes to claims service, you want to stick with a company that’s been there in both good times and bad, and that knows the true costs of a claim, not some fly-by-night company that offers an unusually low price just to make a quick buck. In fact studies have shown that bouncing around from one insurance company to another in search of a lower price actually ends up costing you more in the long run.

Go with a pro

Investing in the latest safety programs and technology, reviewing and updating company procedures and bolstering maintenance efforts can all play a part – but only if you follow the key principle: Deal with a company that understands trucking and is going to be around for years to come.

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