Decisions 2005: Insurance
The worst of a trucking insurance spike, which saw rates increase by 65% from 2001 to 2004, may be behind us but the need for vigilance remains, particularly for carriers hauling stateside.
While rates will differ in every company and in every account, on average we should see single digit increases, in 2004, according to Mark Ram, president and CEO, Markel Insurance.
“The biggest part of rate increases are gone. You should not be seeing what you’ve seen in the last three years but US claims costs for heavy US exposure will not go down,” says Ram, who spoke recently at the recent Ontario Trucking Association’s annual convention. “…It’s not all about your losses. It’s about your exposure rate – what you haul and where you haul.”
Carriers increasing their forays into the US market to take advantage of booming shipment volumes and higher rates have run face first into the litigious US legal environment, which includes a jury-based legal system and associations of lawyers specializing in suing trucking companies
US claims costs have tripled in the 1990s. “Three times as many claims settle for over (US) one million, from only 4 % from 1993 to 1997 up to 12% today,” says Ram.”…US lawyers can get 30-40% of an accident settlement.”
CAPTIVE INSURANCE – IS IT FOR YOU?
Captive insurance may be a feasible option for many companies who benefit from good loss records and control, successful company culture and high compliance standards. Captive insurance in essence takes a more global approach to financing risk, and a group captive suits a homogeneous or a heterogeneous group of companies, trade groups or associations which may face the same degree of risks.
A captive insurance company is a wholly owned legal entity that is established by an individual or an industrial, financial, commercial or governmental organization or organizations to underwrite all, or a selection of, the risks of that organization and its affiliates.
Captives may be domiciled on or offshore in locations that have established regulatory infrastructures to support their development.
They can offer the potential for more stable pricing over the long haul, the opportunity to secure hard-to-find coverage, reduce expenses, and gain more financial control.
“There is no magic wand. Insurers still need to profit and claims need to be paid. The profits, if there are any, come back to the individual who reduces his losses,” says John Slade, National Transportation Practice leader, SVP, Marsh Canada Ltd.
Captives can be thought of as a kind of self-insurance where you pay your claims out of your own pockets. The difference is that a captive is a separate legal entity and as such provides balance sheets, profit and loss statements, and other documents. It also, according to Slade, requires a more formal approach to projecting and funding losses, a critical issue for managing costs over time.
“Volume purchase provides aggregate on losses. A company that drives down their losses benefits three to five years later,” says Slade.
Members in a group captive would still have control over the underwriting terms but share this control with other members of the group, as well as decisions regarding reinsurance, accrual of investment income, and the wide range of domiciles available.
According to Slade, don’t expect immediate savings through a captive. Captives are not quick fixes and involve a minimum time commitment of your funds into the captive.
“Captives take you beyond the peaks and valleys of the market, but they are not for everyone. It depends on the individual company’s determination of how much risk they can take, their size, their financials, how much equity they have in their company, regulations and claims experience. They seldom if ever result in immediate savings. The intent of captives is to open up the marketplace to higher retentions, taking greater risks,” he says.
According to Mark Ram, “In many cases captives make sense, i.e. for companies with 20-30 % loss ratios, or when you just can’t buy insurance for your industry.”
But, he says, long-haul trucking is certainly hugely volatile. “We pay out multimillion dollar losses (regularly),” he says.While captives advertise increased control over your insurance, “the value of being in control of your insurance only works if you’re going to save more money,” says Ram.
And he says captives can increase your risk and end up costing you more.
“The basic fundamentals (for joining the captive) are not there in trucking. Long-haul trucking has been the most unprofitable type of insurance,” he says. In a captive you have to pay all the same costs as you would to an insurance company, but you are often also paying additional broker, manager costs as well as the fronting insurance companies. From an investment perspective, counters Ram, this is historically the worst point in history to get into a captive. He notes that if a traditional insurance company did not charge you enough for the year, they cannot come back to you mid-year for additional funds, while a captive can, under what Ram says is a “cash call.”
CEO Evan MacKinnon’s company, MacKinnon Transport, is a member in the Marsh Fleet Resolutions group captive, which started up in 2002 and is domiciled in Barbados.
“It was a decision for the long-term. We are currently 11 (carrier) members and business partners with a vested interest in the safety, etc. of the other partners. As founding members we can set the guidelines, rules and liberties, and each member has one seat on the board and is an equal shareholder,” says MacKinnon.
So far, private fleets have been discouraged because, says MacKinnon, their real bread and butter is in manufacturing.
“The goals of the captive are that each member improve its benefits and design how coverage is going to look.”
Money in the funds, if not spent, is returned to the owners of the captives to use as they see fit. The real benefits will be in (eventually) increasing the frequency and severity fund,” says MacKinnon.
“Captive insurance facilitates a quicker, more focused response on loss control issues. With a vested financial interest, you are forced to examine the way you do business,” says Nicholas Crichlow, manager, Marsh Barbados Captive Management.
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