Have you ever wondered exactly where your insurance premium dollars go? Sure you have. And, you are absolutely justified in asking this question, given that insurance is one of your most important business expenses.

Insurance companies rely on premiums to pay for five major expenditures: Claims, Broker Commissions, Premium Taxes, Facility Association Costs and Overhead.

When premiums charged are greater than the total costs of these five expenditures, the insurance company is running as it should. However, when total costs exceed the premiums collected, you should wonder about the ability of your insurer to even survive, let alone cover you in the event of a significant claim. This latter point has been the situation in the long-haul trucking industry over the recent past and the reason so many insurers have come and gone.

So how much of your premiums go to each of these cost groups?

Claims – the major cost

Claims losses account for the lion’s share of an insurance company’s expenses, averaging from 70 per cent to – in the most extreme cases – more than 150 per cent of the total amount collected in premiums. In fact, over the past several years, long haul trucking insurers have paid out an estimated average of 125 per cent of premiums to pay for claims alone, before any other expenses.

What are some the things driving these claims costs? For starters, repairs costs have increased dramatically in recent years. Newer vehicles bring better fuel economy, greater safety and comfort, but, as you know, they aren’t cheap. Most equipment today is sophisticated and computerized, resulting in high replacement and repair costs. For trucking insurers, this has meant thousands of dollars added to the amount of an average claim.

If you’ve recently had a serious accident in the U.S., you’ll know why claims costs and premiums have risen dramatically in recent years. Juries 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 desire of juries to make the “deep pocketed_ trucking companies – especially foreign trucks from Canada-and their insurers pay the “little guy” in accidents, the actual cost of medical treatments for those injured has also been rising heavily. The bottom line is that multi-million dollar payouts for accidents are becoming increasingly common in the U.S.

In the event of a multi-million dollar claim, it would take the total of your annual premiums over many decades for your insurer to recoup all it has paid out. Without insurance, a major claim could easily drain the cash of a trucking company, and threaten their very existence.

It’s protection from this type of devastating risk that the biggest part of your premium dollars are paying for, not the small dents in your bumpers.

Broker commissions

Aside from claims, a portion of your premium dollars is used to pay for the services of your insurance broker.

The level of compensation to brokers in long-haul trucking averages approximately ten per cent of premiums. Your broker does not need to be a trucking expert – but he does have to be someone you can trust to place your business with an insurance company that fully understands your industry.

Taxes and facility

association costs

Insurers are also required to submit a special charge to the government called a Premium Tax, equal to three per cent of the total premiums. This tax should not to be confused with regular taxes, which also must be paid.

Another pseudo-tax to auto insurance companies comes from the Facility Association.

The Facility Association is an insurance entity established by provincial governments for auto insurance (which includes trucks) to provide the highest risk drivers and companies a source of coverage when their record keeps them from being accepted by all other insurance providers.

Every insurance company must share their proportional amount of the losses generated through the Facility Association. At Markel, our Facility Association costs grew by almost 400 per cent last year. On average, four to six per cent of your premium dollar goes to covering Facility Association costs these days.

Overhead

An insurance company’s own overhead averages only about seven per cent of premiums paid – so this is not where most of your dollars are going.

When you add it all up over the recent hyper-competitive insurance market of a few years ago, it looks like this: For every $1 received in premiums, about $1.50 has been paid out on average. Even the investment income an insurer earns doesn’t come close to offsetting these kinds of losses.

The bottom line? Make sure you’re with an insurance company that understands trucking, has a track record of doing it well and will be around for you in the long run.

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