Let’s talk insurance: What every trucker should know about insurance
May 1, 2003
So you're a highly experienced, meticulous and safety-conscious trucker. You have a top notch vehicle - or even an impressive fleet of glistening new vehicles - sharp-eyed drivers, low staff turnover ...
So you’re a highly experienced, meticulous and safety-conscious trucker. You have a top notch vehicle – or even an impressive fleet of glistening new vehicles – sharp-eyed drivers, low staff turnover and an accident record as clear as the sky over the Trans-Canada on a bright summer day.
Absolutely nothing like that two-bit trucking company down the road who has already had three or four accidents over the past few years. He’s got older vehicles. Driver turnover every day. And he only services his vehicle’s brakes when they’re squealing so loud it wakes the neighbors.
“So why on earth,” you ask, “is his insurance rate lower than mine?”
It’s a question that has been on the lips of a growing number of truckers these days. Especially in this tough market where rates keep rising due to the difficult economy and the fact that insurance rates overall have been significantly below cost for years. But that’s a whole other article. (If you’re interested in this topic you may want to refer to Markel’s educational publication ‘Let’s Talk Insurance Pricing’ posted at www.markel.ca or call 888-MARKEL-1 and ask for a free copy).
“I’ve had no losses for years – They should be insuring me for nothing!”
There is a common misconception that insurance rates are based solely on a trucking company’s own accident and loss record in past years. By that reasoning, if you have no losses for five years, your insurer should really charge you practically nothing.
Unfortunately, the system just can’t work that way.
There are some truckers who will pay their insurer $100,000 for the year, chalk up only $20,000 in losses (which is a very good 20 per cent loss ratio in the long-haul trucking world) and become enraged that their ‘fat cat’ insurance company just sat back and made a windfall of cash on them.
How unfair it seems. What a swindle!
The reality, however, is quite the opposite.
Out of the blue, after years of flawless performance, that same trucker may have a serious accident and suddenly cost their insurer $5-10 million.
This scenario is unfortunately not rare anymore. That $100,000 the trucker had paid their insurer barely puts a dent in repaying that kind of claim.
This only has to happen once and the insurance company is stuck trying to pay it back, in this example over a period of 50 to 100 years.
It’s a common dilemma and it’s one of the main reasons so many trucking insurance companies have left the business over the years or gone bankrupt. Meanwhile, those that remain have been squeaking by with more losses than profits – contrary to popular thought.
For this reason your insurance company has to charge everyone enough to cover these situations. They will happen – that’s a certainty; the only thing we can’t tell you exactly is to whom they will happen and when.
Remember too, that paying your claims is only one expense in managing insurance. Your insurer also has to pay insurance broker commissions, rent, staff salaries, etc…which, for the average insurance company, amounts to 30 per cent of the annual premiums you pay to them.
So where does your rate come from?
There are two main factors that determine your insurance rate: your Exposure (what and where you haul) which determines your base insurance rate and your Experience (your past claims experience, safety record, etc.) which modifies your base rate up or down.
First off, the base amount you pay is always calculated on your Exposure and NOT on your Experience.
To determine this, your insurance company will look at where you’re going, what you’re hauling, what you are doing – regardless of how carefully you’ve been doing it.
And so, as an example, your shiny new trucks may be hauling dangerous goods all the way to Texas – a state notorious for its complex and expensive legal judgments.
Meanwhile, your sloppy neighbor with his rusty rigs and poor safety record may only be hauling paper products to Alberta. No U.S. Exposure. No tricky cargo. In this scenario, it’s a fact that his base rate, which is determined by his Exposure alone, will definitely be less than yours.
Why Experience Really Counts
After determining your Exposure or base rate, the next thing your insurer will do will be to examine your Experience and safety practices.
His findings will be used to modify, either up or down, your base rate.
The good news for you is this: While your neighbor’s base rate will be less, his final rate will certainly be raised, probably dramatically because of his poor past performance and safety practices, while yours will be significantly lowered because of your excellent record and practices.
Bear in mind, though, that’s not what really matters to you because he’s your neighbor and not your competitor.
When comparing your insurance costs to other carriers you must ensure that you compare yourself to a carrier with a similar Exposure profile to your own operations (your competitor) – the guy you really want the competitive advantage over – otherwise you’re comparing apples to oranges.
You can understand the importance of your Experience and safety practices best with these examples (See chart above): Let’s say that you and your true competitor are both in the high Exposure category because of what you haul and where you go.
You’d both start with an Exposure or base rate of $100 but due to his poor claims record and bad management he might be adjusted up $20 to $120.
Meanwhile, your base rate may be dropped $20 to only $80 because of your outstanding record and diligent practices. In other words, he’d be paying 50 per cent more for his insurance than you.
Same thing if you were both in the low Exposure category.
You’d both start with a base rate of $50 but your good Experience would reduce your rate by $10 to $40 while your sloppier competitor may be adjusted up to $60 – once again a 50 per cent price advantage.
The moral of the story is that safety and Experience ultimately count – a lot more than you might think!
Can Canadian Exposure Levels Make A Difference?
In short, your destination and the type of cargo you haul are the ultimate determinants of your Exposure and base rate.
It’s well known that hauling to the U.S. and hauling dangerous or high-theft cargo represent some of the highest Exposures for truckers.
Unfortunately, in today’s legal climate, an accident in the U.S. that results in injuries to a third party can typically cost an insurance company millions of dollars more than if the identical accident had occurred here in Canada.
But it’s also important to understand that there are many different levels of base rates.
The example used above is only a very simple one.
Canadian truckers who haul general goods within Canada will still face a range of different Exposure ratings based on the specifics of what and where they haul within Canada. It gets down to details like whether you travel in Ontario or Quebec and whether you transport soft drinks or lumber.
These will all be considered in the calculation of your Exposure or base rate.
That said, it cannot be stressed enough that good safety practices (vehicle maintenance, driver selection, etc.), which lead to good Experience, play a critical role in managing your rates.
In the end, how you rate against your real competitors – those with the same Exposures carrying the same goods on the same routes – is what really matters.
So keep up the good safety regime. Your company will do better, incur fewer accidents and ultimately pay less insurance…while also forging a stronger relationship with your insurer. Now that’s a competitive advantage. Next Month – How early claims reporting can help your rates.
– Mark J. Ram is president and CEO of Markel Insurance Company of Canada.