We’ve all seen holiday movies in which ghosts or angels teach the main character an important lesson. Just as in the movies, many truckers today have received visits from ghosts – ghosts of past trucking insurers who left long-haul trucking, leading to disaster for carriers.

These ghosts have a valuable lesson to teach: How to avoid being devastated by “The Death Spiral.”

The Death Spiral is an unfortunate phenomenon affecting most insurance companies that enter long-haul trucking. It’s a predictable, self-destructive pattern that ultimately sees almost every one of them go bankrupt or withdraw rapidly from long-haul trucking insurance, like holiday shoppers through a revolving door.

Long-haul trucking is considered “high-risk” in the insurance industry. It has one of the highest rates of business failure or withdrawal of any line of insurance. Despite this, more than two dozen insurers have tried out long-haul trucking in the past 20 years. However, ask any trucker who’s been around for a number of years, and they’ll tell you – just about every one of these insurers disappeared. They’ve fallen victim in one way or another to the Death Spiral, leaving their policyholders in a serious dilemma. How does The Death Spiral work?

There are seven stops on a trucking insurer’s road to ruin:

1. The lure of large rates: Because of the larger claims and risks, long-haul trucking charges higher rates compared to other types of insurance like cars and homes. New insurers enter the market, motivated by the lure of the rapid growth these large rates represent.

2. No trucking experience: These new insurers typically have no experience in long-haul trucking. They don’t have the data, systems or services to set rates or handle the business properly.

3. Under-estimate claims costs: A long-haul trucking claim where someone has been hurt in an accident with a truck, especially one that ends up in a U.S. court, often takes years to settle. An inexperienced trucking insurer has no way of knowing the ultimate cost of such claims and ends up under-estimating (also known as under-reserving) the true costs. Meanwhile, the insurer believes its business is profitable.

4. Cut rates for market share: Thinking, mistakenly, that they’re making money and have discovered the “magic formula” that all the other insurers who disappeared never figured out, these insurers cut prices further to gain additional market share.

5. Realize true claims costs: After a few years, claims costs mushroom to their true cost. In many cases, claims are settled for as much as 10 times the original estimate.

6. Massive operating losses: After paying out much larger-than-estimated claims, the insurer realizes that they’ve actually been losing massive amounts of money – often in the tens of millions of dollars.

7. Withdrawal or bankruptcy: To cut its losses, the insurer leaves long-haul trucking – or worse, it goes out of business. Policyholders are left in a serious predicament, wondering whether their claims will be paid in full and looking for ways to keep their trucks on the road.

How bad can it get?

It’s no wonder that inexperienced trucking insurers tend to come and go from the industry. At its worst, failing insurers were paying out an estimated $1.50, $1.80 and even $2 for every dollar of premiums they collected. Imagine paying out up to twice more than you collect in revenues. That’s a recipe for disaster in any industry. Remember, the Death Spiral isn’t a solitary ride taken by an inexperienced insurer. Your insurer takes you along on the same ride! If your insurer goes under or withdraws from trucking, you’re the one who may be stranded by the roadside next to your idle trucks.

Knowing the Death Spiral and what motivates some insurers to get your business can help you evaluate an insurer’s intentions and its financial staying power. Discounts can be great, but you also have to know what’s behind that offer.

Just as in trucking, there’s no magic formula in trucking insurance. So, as a carrier, do some due diligence.

Talk to policyholders of insurers you’re considering, and see whether their claims settled within the insurer’s original estimates. You can also check an insurer’s financial stability (its ability to live up to its obligations to policyholders) by getting its insurance rating from a ratings agency like AM Best. Remember, the latest and greatest deal doesn’t sound so good if there’s a risk that you won’t be able to keep your trucks on the road.In the movies, the main character always gets a second chance. Give yourself a fighting chance by recognizing the signs of an insurer bound for failure – before that insurer comes back to haunt your business. Happy Holidays!

– Mark J. Ram is president and CEO of Markel Insurance. Please send your questions, feedback and commentary about this column to letstalk@markel.ca. For more information about Markel visit www.markel.ca.