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Insurance: Insurance Crisis Looming

As if escalating fuel costs, dimmer prospects for freight volumes and worsening labor relations were not enough to worry about, now there are indications the trucking industry could be facing an insur...

As if escalating fuel costs, dimmer prospects for freight volumes and worsening labor relations were not enough to worry about, now there are indications the trucking industry could be facing an insurance crisis.

According to John Chippindale, president and COO of Marsh Canada Ltd., the insurance industry typically goes through hard and soft cycles every four to five years. “But we’re into about nine years of a continuous soft cycle that may be setting us up for a fall,” Chippindale told fleet managers at the recent Ontario Trucking Association annual convention.

“Ideally, an insurance company tries to break even with operating income and investment income. But it has been more than a decade since the insurance industry has been able to do so,” added Mark Ram, president and CEO or Markel Insurance Company of Canada. And, he said, in long haul trucking the losses are great.

Ram said that the general insurance industry’s net profit on the dollar is six cents. “This is nothing stellar. In the banking industry, it’s as high as 18 per cent. But in long-haul trucking insurance, 40 cents are lost on the dollar for insurance operating expenses, which, with the insurance industry’s investment income (for 1999) at 13 cents, means a loss of 27 cents in long haul,” said Ram.

“A client has to realise that the quality of your operation and the existence of risk management (in your organisation) will determine the insurance available.” said Chippindale. He also said that the client’s loyalty and partnership with a particular insurer would affect the cost of coverage. “If you pop around from one insurer to another, they will recognise you as such,” he said.

For insurance companies the name of the game, of course, is to spread the losses of the few with what’s collected from the many. Factors that drive the frequency and severity of claims are the design of the company’s insurance program, claims management, economic conditions, tax issues, the risk profile of the operation, legal trends, social factors, and the competitive environment (for example, the fight for market share.) But Chippindale says that trucking companies should be aware that there is a lot of innovation in insurance products, in terms of financial products that can help business, not hinder it.

“Insurance can be an effective mechanism to run a good business, from a tax standpoint. If you don’t have the capability from your insurer, it will end up catching up with you. Canada has seen premiums rise only about three to five per cent but that’s changing. There will be changes in insurance at the same time as high fuel costs are in place,” he said. As in the trucking industry, many insurance companies have been forced out of the long-haul trucking business, said Chippindale.

“When you look for your insurer, look at how they did in long-haul trucking insurance. That’s what’s going to dictate their future actions and appetite,” said Ram. He said insurance companies that get into long-haul trucking are initially attracted by the high average premiums, but don’t realise claims are often big, and calculated in U.S. dollars. And that’s why many have not lasted. “How does long-haul trucking get so bad (for the insurer)? It’s a sheer lack of experience in long-haul claims, underwriting and fleet safety. We dig ourselves our own hole as insurance companies-by not looking at our bottom lines,” said Ram. This inexperience ends up impacting the trucking industry with wild price swings, poor claims service, renewal uncertainty, and limited choice.

So how can the trucking industry protect itself?

“The best trucking companies are those that have invested in the future. Your best offence is to run a solid operation that invests in safety. And you have to demonstrate that you run a solid operation,” said Ram. So whether or not there will be an insurance crisis in trucking, suggested Ram, will be up to the trucking companies themselves.

One trucking company advocate of using insurance as a mechanism for good business is Mike McCarron, managing partner with MSM Transportation. “I never thought you could use insurance to improve your bottom line, but you can. The insurance company can tell you probabilities of accidents. And it’s the big accident that really concerns you. Without a safety program you are increasing the probabilities of something happening to you.”

McCarron says that developing a safety program in order to be better insured was a difficult process. “The whole culture of the company had to be changed, from the sales force to dispatch to drivers. There’s a certain amount of discipline that you need,” he said. MSM Transportation’s safety plan included bonuses for drivers tied to safety performance. The bonus plan also built in swift consequences and immediate penalties for non-safe practices. “Now, we’re starting to see the fruits of our labor. Premiums are coming down,” said McCarron.

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